In the final of three entries in the recent series on ESOPs, I discussed the merits of one particular type of ESOP, Employee Stock Ownerships plans. This type of ESOP is designed for business owners to sell all or part of their business to their employees. This can be a very effective exit strategy for owners who wish to detach themselves from the business.
This got me thinking about exit strategies in general, so I decided to include additional information.
What Is An Exit Strategy?
Business owners have dreams. Successfully growing the company is one of them. Building and running a successful business has it’s own rewards; but the real payoff comes when the company has material value in the market place. That’s where an exit strategy comes in. An exit strategy is more than a last minute way to detach oneself from a changing business -- It is a comprehensive plan designed to ensure that the business grows and develops in ways that will help owners achieve their personal, professional, and financial goals.
When Should I Create One?
Most people think an exit strategy is the last thing they do before leaving the company. In truth, by that time, it’s way to late. The savvy CEO develops an exit strategy long before that ‑ perhaps as early as the initial business planning process!
Where to Begin?
A good place to start is with an Owner’ Profile. This involves extensive goal-setting around both the lifestyle the owner hopes to lead, and the type of business s/he wishes to build (and sell) in order to achieve it. Such a profile encourages owners to reflect deeply on their values, beliefs, motivations, and goals regarding current and future wealth. The goal is to examine and identify the elements of the lifestyle owners wish to lead, and the people, organizations, and causes they hold in highest esteem. This will lead to early decisions about how owners spend their time and money, how much money will be required to accomplish their goals, and how they will distribute their wealth to heirs and benefactors. It is true that business plans and exit strategies must change due to economic and technological circumstances, but it is easier to edit than it is to create.
What Comes Next?
Armed with a clear and compelling understanding of where the owner hopes the business will take them, they are equipped to take the steps necessary to make it happen. When it comes to that, I think in terms of the following steps:
1. Market Analysis ‑ This involves studying industry trends, evaluating the economic outlook, and reviewing recent M & A activity.
2. Company Valuation‑ This entails establishing the company’s true value using key variables such as EBITDA. It might also involve paying a professional for an independent valuation.
3. Acquisition Strategy ‑ Key elements of this plan include determining when the company is ready to sell, deciding how and when to contact prospective buyers, and developing the preferred transaction structure.
4. Acquisition Team ‑ This includes gathering all the specialized support necessary to do the deal including accounting, finance, legal, tax, financial planning, and brokerage.
5. Marketing the Company ‑ This involves more than just selling the bottom line: It involves packaging the company in a way that evokes excitement and enthusiasm from prospective buyers.
6. Pre-Qualifying Buyers ‑ Preparing the company for sale is half the battle; the other half is finding the right buyer.
7. Preparing Employees ‑ Preparing employees for change is one of the most frequently mishandled aspects of the sales process. Done right, employees are energized to face the challenges ahead. Mishandled, the company stands to lose its key talent.
8. Negotiating the Sale ‑ When you get to this point, you’re almost there. But this is no place for amateurs. Get good help!
9. Due Diligence ‑ More promising deals fail at this time than at any other. Again, plan well and get good help.
10. Motivating Employees ‑ In most situations, maximizing value depends on keeping employees focused and motivated before, during, and after the sale.
11. After the Sale ‑ Even after the deal is done, there’s still work to do. This is the time for earn-outs, transition strategies, and integrating diverse cultures.
In the end, my message is simple. Don’t wait until the end to develop an exit strategy. Create one early and update it as you go along. This way, you will increase the likelihood that the business will help you fulfill your lifelong dreams.