PRIVATELY OWNED BUSINESS EXIT PLANNING
All privately owned or closely held companies, should have an exit plan. Unfortunately, we do not live forever and we often get tired of doing the same things. Therefore, one way of the other, you, as a business owner will exit your business; shouldn't you do it on your terms and when you want to? Shouldn't it be done so you maximize your exit goals, whatever they may be?
A good exit plan is done with at least a 3 to 5 year time horizon so the necessary detailed business, personal,and family planning can be prepared and executed. This process is very holistic, includes you, the business owner, plus family members and perhaps key employees, and will include the use of a number of professional advisors including some or all of the following: investment banker, tax advisor, wealth advisor, legal (business and trust) advisor, insurance provider, etc.
For a successful exit plan there needs to be a quarterback for the process, one who will work with the business owner to create the plan and to coordinate with the other advisors on the team to ensure your success. Tom Caltrider, Managing Director of CDC, has experience helping business owners develop and implement their exit plan.
Exit planning starts with helping the you, the business owner, to fully understand what your exit goals are, to create and execute a long term plan to achieve these goals and to position the business and you to be ready to “pull the trigger” on the exit when the external environment factors (general economy, business performance and the M&A marketplace) are positive and you are ready. For example, 2007 was a great year to exit a business but for most businesses, 2008 through 2011 were poor years to exit. Good planning, good execution and proper timing are the key to maximization of your exit objectives.
Types of Exits
Exiting your business does not necessarily mean selling the business, but rather there are many exit alternatives. Examples of different business ownership exits are:
Family. You may want to transfer ownership to a family member. In this case, you need to ensure that the family member(s) is or are ready to assume your leadership position and show a good probability of being successful, since in most family transfer situations you will hold the paper or finance the deal and the worst case scenario is if your family member fails and you lose a large portion of your retirement assets and cash flow.
Employee. You may want to reward some of your employees by selling them the business; i.e., an employee buyout or a management buyout. This may work well since they should have many of the skills needed to survive and prosper, but one of the issues is can one of these employees step up to be a successful CEO? In addition, what financing will they have access to so you will not have to provide most of the financing of the deal? An ESOP (“Employee Stock Ownership Plan”) is a specialized form of employee buyout that has pros and cons for the business owner.
Re-capitalizations (“Re-Cap”). Sometimes a compete sale of the business is not the best choice for the business owner at the present time, but rather the sale of a portion, either a minority or majority equity share, is the best choice. This allows the owner to take some “chips off the table” so they can diversify their asset base which is a critical component of retirement planning. It may also allow the business owner to spend less time running the business so they can focus on other life issues. In addition, there may be many strategic growth opportunities that require significant capital funding to pursue and having a strategic partner, like a Private Equity Fund, or a strategic industry player will provide this capital and additional resources like management talent, industry access, technology, etc. so the business can reach a new strategic value level. Is it better to own 100% of a business worth $10 million, or to own 49% of a business worth $100 million?
Sale to a partner or other shareholder(s). Hopefully, the partners or shareholders have a signed agreement in place to handle this type of exit but frequently this is not the case. Therefore, one of the first steps in an exit plan where there are multiple business owners is to create with your attorney a suitable shareholder rights agreement or some other type of “divorce” agreement. In this case, having a properly prepared business valuation, done in alignment with this written agreement, will facilitate an easier exit. One important component of such an agreement is how to cover the case of the death or disability of one of the partners, how the ongoing business will be protected and how the business ownership will then be structured. Regardless of having a shareholder rights agreement or not, a good quality valuation will be critical to having a good exit and CDC can provide this.
Shut down or liquidation. This is the worst kind of business exit but according to government statistics a great percentage of smaller companies exit exactly this way. Either they did not have an exit plan, or because the owner died or was disabled, or because the economy tanked and they did not have the capital resources to survive until the economy improved, the only option was to shut down and liquidate the assets for pennies on the dollar. This is not the preferred course of action and can be avoided by developing and properly executing a long-term business exit plan.
Business Sale. This is the most common, a successful exit for private business owners. After the exit planning analysis, you decide how and when you want to sell. Some alternatives include selling to a competition or a customer or other “strategic buyer” or sell to a financial buyer like a Private Equity company. CDC, as an investment bank, has the experience, tools and governmental licensing needed to help business owners sell their business for the best value in the shortest period of time.
There are many aspects of a good exit plan and in our opinion the most important factor is one of positioning. You want to know what your goals are then get into the best position so you can trigger your exit when the situation is favorable and you are ready to exit.
Contact Tom Caltrider at TCaltrider@cdcapital.bz to discuss how Corporate Development Capital can help you with your exit planning and your exit.