With the advent of the New Year just around the corner, and excess cash sitting on balance sheets of companies, is it time to look for an exit strategy? Obviously, a lot depends on the Company’s overall long term plan, where they are in their corporate life cycle, the willingness of the owner or shareholders to sell the business and a host of other issues.
One point is universally clear. No business should be started or acquired, without an exit strategy in mind. That may sound unrealistic, but if the intrinsic value of a business to a potential buyer downstream is not clear before the doors open, then there is a missing element to the business that needs to be addressed before the first sale is made.
Determining the inflection point to pursue to an exit takes courage and determination, since such plans are draining, life changing, and time consuming with a long tail. There is temptation to entertain an exit for the wrong reason. Many will pursue such a plan when the business is struggling, because why sell a business when it is being successful? Obvious—valuations are greater when the business is healthy.
Before pursuing an exit strategy, consider the following:
- Preparing the “bride for the alter”--can take a long time. Many businesses are not marketable in their current state. Audited financial statements may be needed, or an upgrade in the quality of the management team, the renewal of a contract with a major customer, are all examples of actions which may need to be taken before the company is “up for sale”.
- Allow for a lengthy Due Diligence--more and more, buyout agreements call for earn outs for the sellers, which means the seller and buyer have to be in a business relationship for a year or several years post closing. Mutual trust and respect between both parties is critical to a successful exit, and therefore due diligence on the part of the seller is just as critical as the buyer’s actions.
- Having a trusted team--to negotiate the transaction is critical. While this might be intuitive, many entrepreneurs will bypass advisors on the basis of cost or their “opposing points of view”, and will select friends and family to determine the future disposition of their business. Carefully selecting the right team takes time and will be crucial to the success of a transaction.