Business Exit Strategies

By: Kathleen McNamara

You've built a business, and now it's time to leave it behind as you proceed onto the next venture in your professional and/or personal life. Perhaps you want to sell your business, or maybe you're thinking of passing it along to a successor. In either case, you'll need a solid plan to prepare for a smooth transition.

First, consider your ultimate feelings about the company. Richard Krichbaum, president of MNS Financial Management, L.L.C. and a registered investment advisor, suggests that you ask yourself, "What do I envision for this business following the sale?" Your exit strategy will depend on the answer.

The Compassionate Owner

If you indeed care about the business and want it to survive and prosper after the sale, then you'll have to develop a plan to make sure it falls into capable hands.

This is especially true if you believe that the success of your company depends on the unique talent or skill of your successor. For many family businesses, this may mean looking for the right relative to take the reins. For others, it may mean looking for the right manager or team of managers to continue your endeavors. This selection process ideally should take place at least three years -- preferably five years -- before the planned sale date.

Your chosen successor or successors will likely need some incentive to stay on board during and after the sale. You may want to ask these valued employees to sign an employment contract. Or, you may want to structure a "golden handcuffs" deal with financial incentives that encourage long-term loyalty.

Krichbaum offers the well-known local resort management company South Seas Resorts as an example. When the company began to contemplate a sale in 1995, it offered long-term investment opportunities to top managers. In 1998, when the company did indeed sell its resort properties to MeriStar, this management team owned nearly 10 percent of the partnership. The result: the managers had an incentive to stay for the long term. MeriStar, in turn, experienced minimal turnover during the post-sale transition. Today the company retains its well-known quality standards.

If you have no obvious successor, you could create shadowing or mentoring opportunities for those who have the right stuff. A retail business owner who is fond of a bright, hard-working employee, for example, may introduce that employee into the business by having him or her devote partial paychecks into a profit-sharing program. If the employee proves his or her worth, then the profit-sharing program could develop into a partial ownership of the company.

Unfortunately, there's no magic formula for determining the right stuff in a potential successor. All too often, a business is placed into incapable -- or in some cases of family inheritance, unwilling -- hands. The results are usually disastrous. Krichbaum recommends starting the evaluation process as early as possible -- five years is by no means too long. Pay attention to your potential successor's personality traits and long-term goals. "Do they align with your views?" he asks.

Also, consider any possible relocation that may occur if you are selling the business. If the new owner decided to pick up and move the business to another state, will your employees be protected? You may want to consider adding in a relocation prohibition into your sales contract if this is a valid fear, Krichbaum advises.

Lastly, you will have to consider how much to spend on continued investments into equipment and/or employee training programs. How much you spend will affect the short-term bottom line of your business, but it may also be necessary to continue with your long-term vision and the ultimate success of the company.

For example, a business may incur a $50,000 expense for an employee training program. To a potential buyer, that's an expense that has taken away from the bottom line, potentially reducing the value of the business. But from a long-term perspective, the training program may be essential to future business growth or technological change. The $50,000 therefore becomes a one-time capital investment.

The Bottom-Line Results Owner

If you're not as concerned about what happens to your company after you leave the picture, then you will have very different strategic considerations. Because your objectives are strictly financial, you'll want to sell your company in its most efficient form, meaning the highest price.

Instead of looking for a long-term direction, your efforts will be better spent cutting costs and making short-term decisions. You may cut down your labor force or bypass capital improvements. That $50,000 employee training program won't be a part of the picture, either.

You can look to three possible parties to accomplish the sale. A business broker generally deals with smaller, less sophisticated transactions and would be appropriate for smaller companies with less than $2-5 million in revenues. For larger companies, Krichbaum suggests going with an investment banker. There is also the possibility that you could find a buyer yourself, or your company could be bought internally by your managers or other employees.

Remember that businesses aren't considered liquid assets and often require quite a bit of negotiation in the sale. You may be in for some serious wait time -- from 6 months to 3 years -- before you find the right buyer.

Some buyers may push for an earn-out method of payment, meaning payments that are contingent on the long-term success of the company. For example, a buyer could pay for a $1 million business by putting $700,000 down and then dividing up the remaining $300,000 over several years if the business stays profitable.

In such cases, you should be very careful with legal and financial considerations. Krichbaum recalls one case where a seller attempted to sue the buyer when the business didn't perform well and the deferred portion of the purchase price (or earn-out) was not paid as a result. When the case went to court, the facts revealed that the buyer had added many costs to the company in an attempt to avoid paying the full purchase price. The judgement was therefore in the seller's behalf.

End at the Beginning

Advance planning is essential to achieve the most satisfaction from your decisions. Krichbaum advises that you begin to plan an exit "no less than five years before you want the sale to occur."

In fact, you should include an exit strategy in your start-up business plan. Krichbaum compares this deliberation process to that for any other major purchase -- you would obviously want to consider how much the item would fetch on the market if you decide to sell.

In turn, you need to think in advance about what type of timeline you'll follow for a potential sale. If you start a business planning to sell in five years, for example, you won't want to make the same sort of capital investments that you would if you planned to sell in 30 years.

It's also advisable to sit down with a professional and discuss your options. A business valuation consultant can help you consider the full picture of your company's worth, while a financial advisor can help you from more of a strategic standpoint.

The more prepared you are, the more profit you'll likely make from your business. "You want to sell in a seller's market," Krichbaum says. "You don't want to sell in a buyer's market.

"If you have planned ahead, you are selling on your terms."

Kathleen McNamara is the managing editor of Southwest Florida Business managzine