CASE STUDY EXIT STRATEGIES
Why did you start your company? Unless you are independently wealthy, there was a financial component that drove you to be an entrepreneur. Companies are started to address the needs of the owners, employees and customers. Why else struggle to succeed?
The goal of all manufacturing companies is to ….MAKE A PROFIT. Companies will not stay in business if they don’t. Businesses need to be profitable in order to survive. But how much profit is “enough”?
Depending upon your individual needs and desires, “enough” could translate to “enough to maintain a certain quality of life”. Or to having “enough money to travel”. Maybe it means “enough to retire”. Whatever your motivation, at some point you will be faced with the question, “What happens next? What is your exit strategy?”
Many business owners are extremely focused on short term goals (paying the bills is important!) and growing their business. When it comes time to “slow down” or “retire”, they are ill prepared. Why?
If you have a family owned business, you should be aware that, “Less than one third of family businesses survive the transition from first to second generation ownership. Another 50% don’t survive the transition from second to third generation.”
If the next generation is not interested, or the family has had enough, what are the options?
Unfortunately, the list is short: Sell, Merge or Close. Only Selling or Merging may provide a financial benefit to the family, so we must answer the question, what makes my business attractive to others?
I wish to suggest that the root cause of family dissatisfaction on selling price is unrealistic expectations. I would like to draw the analogy to a homeowner placing his/her house on the market, “Of course it is worth $1M. Just look at it!”
What many sellers fail to realize, is that buyers do LOOK AT IT, but not with the same value system. It is the same for businesses. A potential buyer will look at many aspects of the business including: the financial statements, market strategy, future growth potential, intellectual property and organizational structure. Do you have your house in order?
If the goal of the owner is to prepare the business for sale, then the time to get it ready is 3-5 years before! By preparing in advance, you will have choices. Wouldn’t that be wonderful?
WHAT DOES A POTENTIAL BUYER WANT TO SEE?
Profitable businesses attract quality buyers. Distressed businesses attract bargain hunters.
Be profitable. Have a product with a competitive advantage that satisfies a growing market need. Demonstrate that there is a strategy and plan in place, supported by an organizational structure that can execute the plan. Monetize intellectual property so that the new owner will see its value.
HOW DO FINANCIAL STATEMENTS AFFECT ENTERPRISE VALUE?
A buyer will want to see, at the very least, the Balance Sheet, Income Statement and Cash Flow Statement. Without going into the details of what these represent, let me state that EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) will be scrutinized by a potential buyer.
HOW MUCH EBITDA IS ENOUGH?
The real question is, “What is the value of EBITDA necessary to give me the choices I want?”
The following table gives a subjective answer to the question:
HOW DOES THE EBITDA MULTIPLE AFFECT COMPANY VALUATION?
The value of a privately owned business is often determined by a multiple of EBITDA. It then becomes important to understand what affects the multiple and how to maximize it. The factors not on the financial statements above, will have a role in determining the multiple. For example, your industry and type of business are important. These factors are what they are. However, a solid management team - executing and loyal to the organization – will increase the value.
Consider previous table, and how the multiple affects value:
PLAN FOR THE FUTURE!
In addition to preparing the business for sale, owners need to prepare themselves for the sale.
This is more than just mentally accepting a change in lifestyle. Are you ready for the tax implications? Have you set up the proper trusts, wills, etc.? Have you maximized your return? Will your goals be met?
A smart man knows how to change his flat tire. A wise man avoids the pothole.