Guest Contributor Gary Gunderson is a certified business intermediary and president of Empire Business Advisors-Southeast. He is also a member of the International Business Brokers Association; a member of M&A Source; and is also on the board of directors and past president of the Carolinas Virginia Business Brokers Association. He is a member of the Upstate Carolina Angel Network. He has been a Fortune 100 corporate executive; a mid-market CEO; and a small business owner. He has an M.S. from Stanford University.
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All business owners will exit their businesses someday, one way or another. Some will be passed on to the next generation, some will be sold (to employees, investors or another company) and others will simply shut down.
Regardless of which path you choose, planning can’t start too early. You really should outline your exit strategy at the time you start your business. There are many different alternatives to consider. Is the objective of the business primarily to provide a job and a good lifestyle to the owner and maybe other family members? Do your kids really want to take it over when you retire? Do you exit by selling the business to a third party when you reach retirement age? Or are you focused on building high value quickly and exiting early at a high multiple as soon as you prove the business model? Alternatively, is your dream to operate the business for a more extended period, grow aggressively internally and through acquisition, and then exit by going public someday?
Your exit strategy will certainly be driven by the nature of your business opportunity. It will also be enabled or constrained by the availability of capital. What capital is needed to start your business? Can you self-finance with personal or family money? How much cash is needed to fund your growth expectations? Can you attract an equity partner? Is some amount of bank financing available? It is critical that you formulate and implement a capital structure that matches your desired business strategy. If your business will require outside investors, your exit strategy should address three key issues: the time frame for exit, the desired sales price range, and the target buyers.
As you consider business strategies, let me plead for a commitment to value creation. We desperately need existing business owners and startup entrepreneurs to focus on building business value as opposed to just funding a comfortable lifestyle. Only then will they create more jobs and significantly grow the GDP to bring our country back to economic prosperity. Growing business value usually means being laser-focused on growing the business; that is, spend that cash on supporting a new product, not on a vacation.
Another important principle to consider is: “Don’t ride it over the top!” Many businesses experience a business cycle – startup, growth, plateau, decline. Many business owners wait too long to exit. Stuff happens. Optimize your value by selling at the top of the high-growth period.
Consider this example: Biotechnology Company A starts up and grows fast and sells to a big strategic buyer in three years for a large multiple on whatever revenue has been realized. Founders and equity investors enjoy a big payday with extraordinary internal rate of return. All parties are very happy.
Biotechnology Company B starts up and grows fast but defers an early exit, raises more money, continues growth at slower but significant rate and sells on a multiple of EBITDA a number of years later. Although the transaction value may be higher, the rate of return on invested capital to founders and original equity investors may be significantly reduced – while being exposed to more risk. What if the business is surprised by a regulatory ruling or a competitor enters with a new product alternative? An early exit generally reduces risk and enhances returns.
There are a number of specific steps necessary to successfully complete the transition of a business. Preparing an exit plan will definitely help. An exit plan is an ongoing process resulting in the development of an evolving road map for a successful exit. It examines and addresses the personal, operational, financial, legal, tax, timing and process questions involved in transitioning a business.
You should put together an advisory team that will help you plan and execute the business transition. An exit planning professional such as your business broker or M&A advisor can start the process. Planning team participants include: the company CPA, financial advisor, estate planner, business attorney, insurance professional, transaction attorney and other specialists or operational advisors as appropriate. If the business is being sold to a third party, the business broker or M&A advisor should transition to handle the sale process not later than 18 months prior to the desired sale date.
So, when should you exit a business? Do it on your planned terms and on your timetable; and be sure that your co-founders and investors are on the same page as you are, from the very first day to the very last day. If you have done a good planning job as outlined above, you should enjoy a business transition that not only meets your personal needs, but will also maximize your peace of mind.
