One of the first things private equity investors ask when considering an investment in a business is: “what is my exit strategy?” This often strikes business owners as odd: “you haven’t even invested in my business, and you are already considering exit?” is the typical reaction. Business owners should think more like private equity investors, in this regard.
Having a clear vision on exit strategy often provides a compass, a direction as to how to develop the company, in order to maximize liquidity and valuation. The more a business owner can visualize his company’s ultimate purchaser, the more the business owner can develop his company in a way that is likely to appeal to the ultimate purchaser.But before going too far down this line of thought, allow me to define Business Exit Planning:
“Business Exit Planning is the process of explicitly defining exit-related objectives for the owner(s) of a business, followed by the design of a comprehensive strategy and road map that take into account all personal, business, financial, legal, and taxation aspects of achieving those objectives, usually in the context of planning the leadership succession and continuity of a business. Objectives may include maximizing (or setting a goal for) proceeds, minimizing risk, closing a Transaction quickly, or selecting an investor that will ensure that the business prospers. The strategy should also take into account contingencies such as illness or death.” (Business Exit Planning: Options, Value Enhancement, and Transaction Management for Business Owners. By Les Nemethy, John Wiley & Sons, 2011).1
Please note that any exit planning strategy is highly dependent on the owner’s goals. If there are no goals related to exit, there can be no strategy. While a business owner can choose not to sell his company, until advances in medicine make us immortal, he cannot plan to hold on to his company forever. There are at least a dozen options for exit, in addition to selling a company, from passing a company on to one’s children to management buyout, from Initial Public Offering to bankruptcy. Lack of succession planning amounts to an abdication of responsibility vis-à-vis the company, its stakeholders, and the owner’s family. A business owner should at least have a contingency or succession plan as to what happens if he or she is no longer able to run the company.
The above paragraph deals with risk management or protecting one’s downside. There is also the dimension of maximizing one’s upside. The best price for the sale of a company may be achieved by identifying the buyer or at least class of buyers to whom the company is likely going to represent the highest value, and then making the company as desirable as possible for that buyer or class of buyers.Let’s assume you have identified the buyer who is likely to pay the most for your business. What does that buyer think about:
- Minimum revenues or margins that it would like to have in the business, in order to make it an interesting target?
- The types of clients or target markets served by accompany that the buyer would prefer?
- The geographical scope of activities that would be most interesting to the buyer?
- The types of intellectual property, processes or competencies it would like to have in the business?
I trust you get my point. The list could go on and on. This is a basic point of marketing: you create a “pull” by designing a product (in this case your company) that is likely to attract an investor, rather than “pushing” something on a buyer, something that you have created with no idea of the end buyer in sight.
So, you might say, I don’t want to sell my company; I want to pass it on to my children. Do you want to pass something on to your children that is of value? Something that has liquidity, in case the family if forced by circumstances to sell? Then once again, the same “pull” strategy should prevail.
In conclusion, I’d like to use a chess analogy to explain exit planning. Exit planning is like the end-game in chess. What chess player would sit down to a chess game without having an understanding of the end-game? And yet, that is what far too many business owners do. As a business owner, you cannot win the game until you have concluded a successful end game. Your legacy will be judged not only by how successful is a company you built, but by whether your company survived you.