Exit Transition Options & Valuations

Partner Content

5 years ago

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 2 of Optimize & Protect Your Business with an Exit Plan

Read part 1, Optimize & Protect Your Business with an Exit Plan

Exit Transition Options & Valuations

The valuations of exit transition options can vary widely. The more comprehensive the upfront planning and business optimization, the higher the company valuation. Of course, leaving the future transition to chance with inadequate planning places the company’s going concern at risk due to the unexpected loss of the business owner without qualified management in place.

Exhibit A illustrates the magnitude of these valuations for three different options.

Business-As-Usual valuation of a going concern company with an effective exit plan and capable management in place.
Optimized valuation of a going concern company with improved cash flow as a result of an effective strategic plan supported by capable management.
Liquidation valuation where the company loses its going concern because there is no succession plan or exit strategy in place.

In comparing these options, the Business-As-Usual valuation of $4,000,000 which is calculated by taking EBITDA of $1,000,000 times a multiple of four. This valuation is $3,610,000 better than the liquidation option and shows the value preserving the going concern of a business with succession and exit plans in place.

As one might expect, the Optimized Valuation produces the highest valuation. It is valued at $15,625,000 based on EBITDA of $3,125,000 times an enhanced multiple of 5 as a result of an effective strategic plan, growing revenue, and increased profitability along with capable management in place who are running the company independently of the owner. The optimized company produces a valuation of $15,625,000 that is $11,625,000 better than Business-As-Usual and $15,235,000 better than Liquidation.

The Liquidation Valuation (also referred to as a fire side sale) produces the lowest valuation, and the valuation is considerably lower than the other two options. In this option, the company is being liquidated, thereby receiving only ten cents on the dollar because it must sell now with no one capable of running the company. The company does not have an effective succession plan in effective to replace business owner, and thereby the company is no longer a going concern. Survivors of the company are desperate to limit the future losses and are motivated to liquidate it now.

Obviously, this exhibit illustrates three widely different options of a make-believe company. It also shows the wide fluctuations of valuations caused by proper planning while the business owners is still functioning in the business. It would be considered a best practice for a business owners to take the necessary time and these numbers for his/her company in order to fully understand the options of opportunity. As also illustrated by this exhibit, there could be a lot of wealth riding on this planning emphasizing the need to get started now.

Steps for Optimization, Succession, and Exit Plans

Here are some recommended planning steps that should be considered for optimizing business valuations, developing effective succession plans, and agreeing on a comprehensive exit strategy meeting the desires of the business owner.

Prepare a comprehensive Buy/Sell Agreement with an agreed upon valuation formula and payment terms, and update it annually as an official corporate to ensure understanding.
Evaluate and secure life insurance policies on the business owner in order to facilitate the exit transition.
Prepare a SWOT analysis of strengths, weaknesses, opportunities, and threats with the management team and ownership to identify ways of adding value and to differentiate the company from its competitors.
Prepare a 3-to-5-year strategic plan with stated financial metrics to evaluate progress.
Develop high potential initiatives for growing revenue, increasing productivity, leveraging debt, and optimizing balance sheet and measure progress quarterly.
Appraise the value the company annually to evaluate performance, to understand the value drivers, and to monitor progress of strategic plan.
Prepare a written succession plan and acquire the necessary talent to add capacity and to become self-sufficient without the owner.
Identify and develop potential successors; who do you want to own and operate the business?
Restructure the business owner’s job responsibilities allowing him/her more time for planning, training, customer care, and creating value. This planning transitions the owner from the CEO to the Chairman of the Board.
Obtain an outside, objective perspective for identifying opportunities, monetizing results, and holding management accountable. This person will provide a different perspective, offer new ideas, and help keep the planning and review process on track.
Prepare the company for sale by fine tuning your sales pitch and preparing supporting documentation.
Investigate M&A activity so you better understand value drivers and market opportunities.
Review financial results monthly, quarterly, and annually, assess progress, and take necessary corrective action.