Exit Planning for Independents
(and Other Lube Makers)

 By Craig Overstreet, Janas Associates.
Reprinted with permission from Lubricants World

The owner of an independent manufacturing company might feel little motivation to spend time considering departure from the company he or his family founded. Nevertheless, a well-defined exit strategy should be an integral part of strategic planning. Ultimately, every business either sells or ceases to exist.

An exit strategy is designed to provide focus with respect to vision and goals. An important result of planning is to maximize the enterprise value. A well-developed strategy defines financial and personal objectives of the company's ownership. Owners who manage actively past the time when an effective transition can be planned ordinarily experience a significantly reduced price on sale. Exit strategies can include acquisitions to build value, merger or sale, or transfer of management and ownership to family members through a succession plan.

Many independent lubricant manufacturers are underperforming, primarily because of a weak economy and an inability to pass through escalating raw material and energy costs to customers. Underperforming businesses do have alternatives if management acts decisively.

One Option: Sell

One increasingly likely scenario is that someone would want to buy your business. Among potential buyers are the following:

• Companies employing turnaround managers whose experience includes the expertise to enhance profitability;

• Lubricant marketing companies that lack manufacturing capability and want a platform to facilitate backward integration;

• Companies pursuing rollup strategies with a goal of developing a national presence;

• Companies who want to expand and realize that acquisition is more cost-effective than construction of a comparable greenfield facility;

• Companies whose strategic objectives would be met by your company's physical location, industry reputation, proprietary formulations, advantageous supplier relationships, customer base, or brand recognition; and

• Investors who are seeking an acquisition platform.

When a company owns its real estate, the business and the real property should be valued separately. The enterprise value of the business is ordinarily based on a multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA). The rental value of the real property will be considered in calculating EBITDA, while the real estate value itself is based on an appraisal. Because of environmental risks, continuing ownership of the property warrants careful evaluation.

Acquisition prices are a function of historical earnings and other factors. To the extent that future earnings opportunities result from the existence of the business, the EBITDA multiplier may increase.

If mechanisms are in place that could have a significant effect on earnings growth, a contingent earnout agreement can bridge the gap with respect to anticipated future earnings. With an earnout, a portion of the consideration is paid if future earnings targets are met.

Plan Early to Sell High

Early development of an exit strategy can have a significant effect on the results of a sale (the operative word being "sale"). With advance planning, all aspects of the business can be made ready for a sale by addressing the following:

• Facilities cleanup and beautification;

• Creation of detailed management and staff job definitions;

• Assurance of up-to-date, business-only accounting;

• Elimination of personal and non-arm's-length transactions;

• Elimination of any environmental issues;

• Assurance of at least 6 months' time before consummation
  of the sale; and

• Securing of professional assistance from a qualified consulting-oriented investment banking firm.

To plan and execute an exit strategy, company owners should consult several advisers. An accountant can provide advice on tax and accounting aspects of a transaction. Legal counsel can advise on legal matters including environmental questions, state and federal issues, representations and warranties, and preparation and review of documents.

Identification and availability of qualified buyers will significantly affect the price achieved. An investment banker with specific lubricants-industry knowledge can provide a substantial advantage during the sale process. Your investment banker can estimate the realistic value of the business, prepare the offering memorandum, identify and market to qualified buyers, assist in the negotiation and structure of a transaction, and ensure that the progress of the transaction remains on track.

Advance planning of your exit strategy will have a direct effect on your exit value. Your company may be worth more than you think.

Craig Overstreet is a senior consultant with Janas Associates Houston, LLC, which provides consulting services to the lubricants industry in the areas of mergers and acquisitions, corporate finance, and management. Contact him at phone (713) 863-8327, fax (713) 863-8307, or e-mail overstreet@aol.com. The Web site is at www.janascorp.com.