RSM Resources

Many midsized business owners and executivesreadily admit they spend far more time running a company than planning for theday it may be sold. However, experts say that approach can be an expensivemistake.

"Not too long ago, I heard about awell-known, private company where the grandmother — who was in her 90s — stillowned all the stock," says Tom Ogburn, a family business advisor andprofessor of management in the Babcock School of Management at Wake Forest University. "Thatstock was never transitioned, and when she died the tax liability was so largethat the company had to be broken up and sold to cover it."

Stories like these should raise immediate concernsabout the need for solid, well-designed exit strategies, but recent surveyssuggest most business leaders don’t take the issue seriously. In a 2005 poll ofmore than 350 CEOs leading fast-growing private companies, nearly two-thirdssaid they were planning to step down within a decade. However, 43 percent ofthose same leaders said their companies had done little or no exit orsuccession planning.

The ideal time to define an exit strategy —outlining the financial and leadership conditions under which company controlcan be transferred — is when the business launches. After all, the owner willat some point relinquish control. The reality, however, is that most businessleaders wait years before digging into the details of an exit strategy.

"This is not something you can do well in 12months," Ogburn says. "In fact, I’d say a minimum time horizon isfive years, because many common exit strategies can take years to playout."

Be strategic
Owners sell their businesses for manyreasons. For example, some may choose to sell upon retirement, to pursue moreleisure time or to invest the capital elsewhere. Whatever their reasons forselling, owners typically share the common goal to maximize the selling price.

"By having a well-conceived and flexible exitstrategy, a business owner can control the timing and pace of the businesssale," says Randy Krauthamer, managing director, RSM EquiCo, an investmentbanking firm serving the private middle market. "An exit strategy can helpgive the seller an edge over the buyer."

Too often, business owners let rigid personalplans drive their exit strategies. For example, an owner may plan to sell abusiness when he or she reaches 60, but that objective may be out of sync withthe goal of maximizing selling price. For example, if a person who plans tosell at 60 becomes ill at 58, he or she may have to sell the business at asharp discount to make a quick exit. In addition, an owner’s retirement age maynot match the optimal market time for selling the business — a peak period ofthe merger cycle that could yield a substantial premium.

"By retaining the flexibility to sell at themost opportune time, such as when buyers are flush with cash or during a periodof industry consolidation, a seller most likely will obtain a higher premiumfor his business than during a less ideal environment," Krauthamer says.

Three steps to success
Do you have a sound exit strategy inplace? If not, experts suggest the following three steps to help get youstarted.

Step 1: Establish a business valuation. What’s your business worth? The answer to this questionmay be the most complex and critical part of the selling process. As a seller,you want to establish the highest supportable valuation for your business. Alsokeep in mind that the buyer is more interested in the business’s potential thanits past performance. Accordingly, experts recommend you adjust your financialstatements to subtract your expenses that will be eliminated after the sale;conduct research and analysis to show the business’s market value, includingstrengths, weaknesses, opportunities and competitive threats; and calculate proforma financial statements for five years into the future, giving the buyerconfidence to move forward and pay a premium.

Step 2: Find the right buyers. Business owners may be emotionally inclined to turn tofamily members or employees as potential buyers. However, such transactions maynot be the best financially. Employees and families may need the business tohelp finance the purchase, potentially saddling it with debt. They also may lackthe management, marketing expertise or other resources that the business needsto grow. Instead, experts recommend that business owners look to potentialstrategic buyers, such as large public corporations and private-equity groups.These players can bring the capital and other resources that give the businessmore growth potential — and they typically have the resources to pay topdollar.

Step 3: Establish an auction-type biddingprice. To obtain the highest possibleprice, experts recommend that business sellers actively market their companiesto premium buyers around the world. By creating an auction for the business,you can create a competitive environment. Just two or three bidders can producea higher price for a business than what a single interested party might pay. Anauction-type bidding situation also may be the best way to deal withcompetitors who are interested in buying, provided they can participate in aconfidential way that does not jeopardize the reputation or market position ofthe seller.

A final consideration for sellers is the focus oncorporate governance in the wake of the Sarbanes-Oxley Act of 2002 (SOX). SOXapplies to public companies, but it has made all types of buyers of all typesof businesses concerned more than ever with issues such as proper accounting,internal controls, fraud detection and appropriate financial reporting. If yourexit strategy involves an initial public offering or the prospect of selling toa publicly traded firm, consider how your company complies with SOX. Evenprivate buyers, though they’re not required to abide by SOX regulations, maywant to see SOX-like functions that could make your firm much more desirable.

Be sure you have an exit strategy for your business, even if a sale may beyears down the road. By following a sound strategy, you can get the bestpossible price for your business and put it in the strongest possible positionto thrive after you leave.