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Planning an Exit Strategy:
Enhancing the Chances of a Favorable Sale
By R. Carter
Freeman and Anthony J. Mulkern,
Janas Associates.
Reprinted with permission from The Tube & Pipe Journal,
October/November 2001
It is no secret that the tube and pipe industry is highly
fragmented and comprises hundreds of small companies. Unless you are
one of the big players who will be left standing at the end of the
game, one thing is certain: Eventually you will sell your company,
or it will cease to exist.
Whether or not you plan a sound exit strategy can make the
difference between negotiating a successful sale or watching your
company wither away. Only 25 percent of companies put on the market
actually sell. How can you ensure that you get the desired outcome
for your company, with the financial results you want?
Exit Planning
The answer is through sound exit planning. Most business owners
do not dedicate serious effort to preparing their companies for
sale. Even companies that plan and budget regularly fail to consider
how management's approach to operations and
profitability may
affect enterprise value and an eventual sale. Exit planning should begin at least a year before a target sale
date. In a perfect world, it starts on the first day of a company's
operation.
Some of the
essential considerations related to planning for as sale include:
Timing. A company's market price - the
amount buyers are willing to pay - can fluctuate dramatically
throughout its life. Careful planning, late planning, or pure luck -
good or bad - can produce different outcomes, as the following
examples illustrate. In a recent sale effort, a
company understated the value of its inventory. Correcting the error
would have resulted in a significant increase in profitability and
sales price, but also could have resulted in a large income tax
bill. Fortunately, a CPA firm discovered that the error occurred in
a tax period for which the statute of limitations had run out, and
so there was no tax bill. The owners of a tube and
pipe company delayed sale while they obtained the QS9002 designation
required by its largest customer. The delay consumed more than a
year. During that year the company's fortune changed dramatically.
An economic downturn, coupled with the loss of its largest customer,
resulted in a 60 percent reduction in revenues. The subsequent sale
generated a price that was one-third less than that originally
anticipated. In another transaction, company owners
designed an exit plan with an investment banker two years before
implementing a well-orchestrated sales effort. The team achieved a
price of more than $50 million, which was significantly more than
its goal of $38 million and an original offer of $24 million.
Exit Strategies. All strategic planning begins with a
vision. Determining where you fit into this vision can be a crucial
component of the exit strategy. You might want to retire fully,
obtain a limited employment contract, retain a minority share
indefinitely, or gain a senior career position as part of a much
larger entity.
What is your time frame? Nothing is sadder to see
than a once-successful owner who has failed to plan and then sells
or liquidates only after a significant decline - ultimately earning
a small fraction of what the company was once worth.
Enterprise and Realization Values.
Enterprise value, or asking price, usually is determined by a
multiple of earnings before interest, taxes, depreciation, and
amortization (EBITDA), adjusted for various financial and subjective
considerations. Realization value, the amount you actually receive,
typically equals the price minus interest-bearing debt. It makes
little difference how many years it took to build your company or
how much you have invested in machinery if you have no earnings to
show.
If you have a sales figure in mind that you want to
obtain, you need to plan to achieve the kind of earnings it takes to
get that price. The primary reason companies do not sell is an
unrealistic asking price.
Assuming you can get an acceptable price, how do
you want it to be paid? In addition to cash and promissory notes,
other common ways acquirers pay are through consulting agreements,
non-competition covenants, and employment contracts. These may be
combined with earnouts and other contingent payments. An earnout is
payment based on a shared percentage of future profitability that
can be defined in various ways.
For the acquirer, contingent payments transfer a
portion of the acquisition price risk to the seller. For the seller,
contingent payments may serve as a method for increasing the
ultimate price. Earnouts sometimes bridge the gap between asking
price and offer. They also may entail tax advantages.
Finding Potential Purchasers
Once you decide to sell, how do you attract buyers
while maintaining the confidentiality 'needed to continue smooth
operations? If you wait for the to contact you, you default to their
timing. Further, the ideal buyer might never appear. You also need
to protect competitive information while marketing to other
companies in the same industry. One way around these issues is to
involve an intermediary who specializes in corporate sales.
Finding the right buyer often is more than a matter
of price. Many owners want their enterprise to survive their
departure and seek stability for loyal employees and customers. This
may eliminate buyers who would relocate or resell the company in a
couple of years.
The ultimate success of any business sale depends
on presentation and negotiations. A confidential business review
should be prepared that describes in detail the history, current
condition, and prospects for the company and contains extensive
financial analysis. Such a report represents the company as well-run
and organized, simplifies the sale process, and tends to result in a
higher realization value.
Broaden Your Scope
Deciding to sell your company can be among the most
stressful business decisions you ever face. Your future and the
future of your company are too important to leave to chance. Talking
to industry peers, reading up on the subject, discussing the
potential sale with your accountant, and hiring an intermediary to
represent you are some of the ways you can become more fully
prepared for your final business transaction.
R.
Carter Freeman, CMC, is Chairman, and Anthony J. Mulkern,
Ph.D., is Managing Director of
Janas Associates, 201 S. Lake
Ave., Suite 416, Pasadena, CA 91101, phone 626432-7000, fax
626-432-7050, email
rcf@janascorp.com, website
www.janascorp.com.
Janas Associates is an investment banking firm that specializes in
mergers and acquisitions, corporate finance, and management
consulting.
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