Exit Options For Business Owners
by Edward B. Lasak, CPA, MS
Partner Content, part of the “_______” Journey series.
With 35-years as a CFO, COO, Ed collaboratively consults with and empowers business owners by developing high-potential exit strategies, succession plans, and company valuations integrated with a comprehensive strategic vision.
Part 3 of Optimize & Protect Your Business with an Exit Plan
Many business owners believe that exit strategies are mainly for selling the business to an outside buyer, perhaps a strategic buyer or an investment banking company. Everyone has received these letters of interest. The truth is that few business owners will exit their business in this manner. In fact, some that have, quickly determined just how much they miss their involvement with the business that they built. Let’s face it, playing golf full time sounds good initially, but the luster wears off quickly for many, and they long for their life as a business owner. Many times they sell the asset that they love the most, and don’t find that out until it is too late. They make this mistake because they did not thoughtfully explore their available exit strategies.
What business owners don’t miss is working 80 plus hours a week when they have the interest, freedom, and money to explore other opportunities. The most preferred exit strategy would be to restructure the business owner’s job to more of a part-time commitment primarily focusing on planning, value creation, management development, and progress reviews as part of the board of directors. It means a transition from an operator to an owner. Quite often this role change will add optimal value to the company by best leveraging the value of the business owner for developing plans and moving the company forward with less reliance on daily responsibilities.
Here are some other exit options that should be evaluated based on the wishes of the business owner:
- Develop next generation family members to run the company.
- Sell a minority interest in the business to a new partner who could contribute capital, acquire higher margin customers, and/or provide other special skills for moving the company forward. As a point of caution, it is important to maintain the majority of ownership of the company in order to maintain control over your asset.
- Sell a portion or all of your ownership to the employees as part of an ESOP. ESOPs have been around for many years and it is an option to sell the company to his/her employees at market value, in a confidential manner, and with very attractive tax incentives while preserving the family legacy.
- Sell your company to the management team and find a financing vehicle to fund the transfer of ownership.
The Value of a Business Valuation
Very few business owners truly know the value of their business. From a valuation methodology, businesses are valued on future cash flows, market values of similar businesses sold, liquidation value, or a combination of these three established methods. Valuations are driven by future cash flows, operating risk, and debt leveraging opportunities.
As a best practice, one should prepare a valuation at the outset of optimization, succession, and exit planning in order to provide a base for measuring progress. The valuation process will identify the value drivers that can be leveraged in creating value during the strategic planning process. Also, subsequent management performance and incentive plans should be evaluated based on the incremental value created and realized. It is also a perfect management tool for evaluating progress to the strategic plan and the perfect mechanism for determining value of a Buy/Sell Agreements. It is just as important as doing your annual tax return.
Prospectively, every business decision you make should be based on its impact to your company’s valuation.
The value of a business is one of the largest assets on a business owner’s personal balance sheet. Additionally, there are many stakeholders, such as customers, vendors, employees, partners, and family, who are dependent upon its existence, and would suffer financially if there was a sudden loss of the owner without effective planning in place to protect the transition. As one can see from Exhibit A, it is in everyone’s best interest to take steps now to first optimize the business valuation, and then, protect the transition of ownership with comprehensive strategic, succession, and exit plans. The best time to do this planning is now when all key parties are functioning in the business.
Likewise, if the business has shared ownership, it is equally important to have an effective and annually updated Buy/Sell Agreement in place specifying the valuation formula in order to transfer stock ownership to the remaining partners quickly, at fair market value, and with acceptable payment terms funded by future cash flows of the business and supplemented, as needed, by life insurance. This transition needs to happen quickly and without delays and disputes in order to protect the business as well as all stakeholders.
The owner needs to find time to begin this planning today. This transition planning includes a strategic plan for optimizing the business, a succession plan for transferring operating responsibilities, and an exit plan for transferring ownership. It needs to be updated annually in order to remain current and relevant. The ultimate goal of the planning is to achieve a self-sustaining company that fully functions without the daily involvement of the owner. This goal will optimize value and will attract potential buyers.
This planning is not something that can be completed overnight, and the preferred exit strategy is based on the wishes of the owner. Moreover, one solution does not fit all companies. It is a collaborative process that can take up to three years to perfect in order to achieve ultimate value and to protect all stakeholders.
As part of this process, one should seriously consider employing the ongoing perspective of an experienced, outside consultant that can help to identify opportunities for adding value and reducing risk as well as to coordinate plans with the various service providers ensuring that everyone is on the same page. If prepared correctly, the strategic, succession, and exit plans will collectively optimize the owner’s wishes by selling at the desired price, with optimal terms, and to the desired buyer while minimizing risk.
Finally, it is important to measure progress of these plans by understanding the company’s valuation at various stages during the process paying particular attention to value drivers and the change of value annually.
Unfortunately, no one knows when an exit plan will be needed, but it is important that one is available to execute in order to ensure a going concern and to protect stakeholders. Most importantly, it is critical to begin this planning today.
Read Part 1
Read Part 2
Need a comprehensive plan? Contact Ed Lasak.
Sources – Header Image Credit – provided by Ed Lasak
This story is Partner Content.