If you, like many business owners, have invested years into growing your company, the decision to step away is not something to take lightly. Thoughtful business exit planning allows you to take charge of this process and avoid the consequences of a hasty, emotionally charged decision. By planning ahead, you get the chance to create more value, weed out issues, and explore options before pulling the trigger – all leading to a more marketable business.
Even though no two companies are exactly alike, the steps for exit planning are the same. I will walk you through each of the steps below. And, having bought and sold dozens of companies, both for myself and on behalf of clients, there are three fundamental concepts I’d encourage you to keep in mind.
- Timing is everything. Some owners look to sell their company when times get tough, but that decision may cost them. When exogenous forces, such as Covid-19, affect the economy, it’s tough for buyers to see if a business’s decline is due to external factors or intrinsic issues. This uncertainty forces most serious buyers to either step away or present lowball offers. If possible, address your challenges and build your business into a better position before pursuing an exit.
- Buyers are more sophisticated than ever before. In the past, it may have been possible to hide issues with your business from potential buyers. This is virtually impossible today. Modern buyers have extensive expertise and a legion of third-party experts they rely on.
- Buyers want to buy ramp. Ramp, in this case, refers to the future growth prospects of a business. A company with an upward trajectory commands a much higher price. As difficult as it is to step away from a growing company, I’ve done so many times and never regretted it. I’d advise you to do the same. Get your company in a strong position and sell when there’s still ramp on the table.
Now, let’s take a look at the steps involved.
The 6 Steps of Business Exit Planning
1. Strategic Planning (6-12 Months)
The first and most crucial step of business exit planning is to define your goals, evaluate potential exit strategies, and prepare your business for a transition. This process can take anywhere from six to twelve months, depending on the scale of changes required.
As a business owner, you must consider what you want. Are you a serial entrepreneur looking to partner with an investor to jump-start your company’s growth? Or, are you looking to make a complete sale so you can move on to your next venture or retire? Whatever you have in mind, it’s critical to clarify your goals so you can choose an exit strategy that’s best for you. The most common types of exit strategies are as follows:
- Acquisition – This involves the sale of your business to a competitor or strategic buyer, who will either merge your company with another or grow it independently.
- Transitioning the Business – The business owner eases out of everyday operations by handing over day-to-day responsibilities to a trusted business partner, employee, or family member. This involves a succession plan and a focus on business continuity.
- Initial Public Offering (IPO) – Listing your company on the stock market is an optimistic undertaking for those with a long-term exit plan. The purpose is to gain a significant cash infusion to fund growth initiatives and build value.
- Liquidation – This is when a business sells everything to pay off its creditors then divides whatever remains (if anything) among its stakeholders. It’s a “last resort” approach typically employed by owners who didn’t have a business exit strategy and find themselves in a situation where they must quickly sell the company.
Keep in mind that there may be other components to consider too, such as:
- Minimizing the individual and corporate tax burden of the exchange. This may involve choosing to sell stocks vs. assets, setting up tax-free exchanges, or deciding between a C-Corp, S-Corp, or LLC/Partnership.
- The future of your management team after the sale.
- The legacy you leave behind (company values, culture, succession).
Regardless of the exit strategy you choose, it’s crucial to consider the story your company will present to potential buyers (or stockholders). And you may find it helpful to seek the advice of an independent expert, such as a fractional CFO, who can help you prepare for the eventual sale.
Buyers, as mentioned before, want to buy ramp. Companies with operational issues, declining sales, or that are perceived to have peaked receive offers in the range of 4X EBITDA (earnings before interest, taxes, depreciation, and amortization). On the other hand, a business with little-to-no-issues, strong growth opportunities, and high-quality management can command a premium of 7X EBITA – a difference of over 40%, which could equate to millions of dollars.
Preparing a company for sale – whether through cutting costs, exploring new markets, or creating new products – will take at least a year to produce meaningful results. When you start seeing positive results and believe the timing is right, you can begin the formal sales process.
2. Preparation and Packaging (2-3 Months)
Once you’ve clarified your goals and your business is in strong position, it’s time to move on to the next step of business exit planning: hiring an investment banker to conduct the sale and/or an advisor to help navigate it. If a fractional CFO or other independent expert helped you prepare your business, they can help you choose your banker, stand in during key management meetings, and interface with potential buyers.
It is essential to hire specialists that understand your industry and have sold your type of business before — for one specific reason. They will know how to connect you to the right buyers, serious buyers who are an ideal fit for your business.
Your advisor and banker will guide you through the process of selling your business. During this step, they will work with you and your team to develop and package your story. They will create key deliverables such as information memorandums and management presentations that demonstrate your company’s value. Then, when the time is right, they will reach out to their connections on your behalf to bring suitable, high-caliber buyers to you.
3. Targeting, Marketing, and Structuring (1-2 Months)
The benefits of an investment banker manifest when they begin reaching out to buyers. A well-run sales process says a lot about a business and will translate to higher offers.
A successful sales process creates a selective, competitive environment that enables the business owner and potential buyers to assess the strategic fit of the transaction. Business owners can vet each buyer’s goals and intentions, which allows them to ensure the continuity of things that are important to them, such as maintaining corporate culture or ensuring the well-being of current employees. Buyers, on the other hand, have the opportunity to explain their goals and differentiate themselves from the competition.
I would caution you to avoid inexperienced investment bankers with minimal industry connections and expertise. They typically take a one-size-fits-all sales approach, which involves email blasting thousands of potential buyers. This mass auction approach affects the caliber of buyers that respond. Since it requires so much time and effort to differentiate oneself in a mass auction, many strategic buyers choose not to participate. As a result, non-serious buyers slip into the sales process, which wastes precious time. The quantity over quality mantra of these bankers also means they won’t bother to get to know your business intimately, making them poor representatives for your company.
Ultimately, the goal of this stage is to identify a few promising buyers to move forward with. This involves getting them to sign NDA agreements, assessing whether they are a good fit for your company, and beginning to structure the deal.
4. Term Sheet and Due Diligence (1-2 Months)
At this point in the process, the pool of buyers will be down to just a few serious contenders, who will send something called a Letter of Intent (LOI). A LOI is a formal declaration of the buyer’s desire to proceed with the purchase.
After you accept the LOI buyers will conduct their due diligence to get as complete an understanding of your company as possible. They will typically pull in third-party specialists to help crunch numbers, understand the risks, build contingency plans, and hold management meetings.
Having a stellar internal management team and investment banker will pay dividends during this step because they will represent your company in the best light by anticipating and providing answers to your buyers’ questions. Assuming there are no hidden surprises, and their findings are satisfactory, the remaining buyers proceed to the final step of the sales process.
5. Negotiation and Legalities (1 Month)
At this stage, buyers will start presenting their offers.
There are two high-level pieces to an offer: price and terms. The price is self-explanatory – it is how much the buyer is willing to pay. Terms, on the other hand, are more complicated because they dictate how the buyer will pay and the criteria for completing the sale.
Remember, this is a negotiation where you are seeking a win-win for both parties. Buyers typically don’t offer good prices and good terms, so business owners must be flexible. If a business owner enters negotiations with the expectation of getting everything they want, the likelihood of closing the deal is low.
This is important. When a company fails to close a deal, it creates a pall over the company that diminishes its value in future deals. Buyers often undervalue businesses that failed a sales process. They become skeptical because they don’t know if the deal folded due to issues uncovered during due diligence, a cantankerous owner, or some other concern. So, it’s best to get this right the first time.
For example, imagine a business owner who is looking to sell his business and retire. He plays a pivotal role in his company’s operation. To prevent the company from struggling in his absence, the buyer sets terms that require the owner to stay with the company for a few more years. These terms run counter to the owner’s goals, but he knows he needs to be flexible and agrees to delay his future retirement, in exchange for a higher sales price.
Once an agreement has been reached, your banker’s team will help complete the deal, making it legally bulletproof and finalizing any remaining conditions.
6. Navigate the Transition (6-12 Months)
When the deal has closed, your business exit planning efforts have paid off and the company handover begins. A successful transition can take anywhere from 6 to 12 months to complete and requires intense planning to pull it off with minimal issues. The former business owner may remain involved with the company for years after the transition, depending on the terms of the sale.
During this step, the buyer will solidify the role of the acquired business. Did they purchase the company to run on their own? Is it part of a buy-and-build strategy? Or, will they merge the company with one that already exists? It all depends on their original goals.
Regardless of the buyer’s intent, they will also evaluate and potentially change the following items:
- Key Systems – There may be a need to update, replace, or consolidate systems and software depending on the buyer’s needs. These changes will affect all aspects of the company, from HR and accounting to manufacturing and product development.
- Existing Management & Employees – Depending on the terms of the deal, the newly acquired company will either keep members of the management team or begin replacing them. For some strategic buyers, it’s common to replace members of senior management and lay off significant portions of the workforce.
- Reporting Processes – Much like how systems and software are evaluated, so too are reporting processes. If the buyer decides to bring new software onboard, they may also need to adjust reports to accommodate changes, track new metrics, and potentially execute differently.
Business Exit Planning: Key Takeaways
The decision to exit a business should be carefully planned, considered, and executed. To maximize value and minimize disruption, business owners should seek the advice of professionals who specialize in their field. If you are considering selling your business during periods of economic turmoil, look for professionals who have weathered such events in the past such as the Great Recession (2008-2009) or the Dot Com Crisis (the late 1990s).
Remember that buyers want to buy ramp and are more sophisticated than ever. An ideal business should be profitable and have strong growth potential. If the timing isn’t right due to market conditions, the state of your business, or even the current pool of buyers, consider waiting until conditions get better.
If you have questions about business exit planning, The CEO’s Right Hand can help. Our fractional CFOs have decades of experience in buying and selling businesses across multiple industries. Get in touch with us to speak to one of our CFOs.