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Exit planning is the process of preparing your company for sale and positioning it as an attractive purchase candidate in a M&A transaction. Potential acquirers could include financial buyers, such as a PE firm, or a strategic buyer, such as a competitor. If you want to maximize the sale price of your company, hiring an attorney and an investment banker aren’t enough. They will only help you sell your company as-is. But what you want isn’t the current FMV. You want the maximum value it could be worth. In the words of one investor:
“Perhaps the most important piece of the initial business plan that is commonly overlooked by entrepreneurs is their exit strategy. It probably seems silly to spend much time thinking about how to liquidate your future interest in a business that doesn’t yet exist. Yet, your exit strategy impacts many directions that you might choose in growing your business. Not considering your exit strategy early may indeed limit your options in the future. Remember: It is not a matter of if you will sell, or otherwise dispose of, your interest in this business. Your only decisions are when and how.”William Payne, Investor, 2005
The keys to shareholder value creation are talent acquisition, talent retention and succession planning. These fall into the Human Capital category of Intellectual Capital. Most smaller companies really are only selling their Relational Capital – the value of their customer relationships. They have yet to create Structural Capital, which would permit them to be truly self-sustaining. Succession planning is so important because it positions a company to prosper perpetually. That requires having a system in place (Structural Capital) – to continuously hire the right talent (Human Capital). Then you must reward your people for aligning with the company’s Key Performance Indicators. With these in place, you now have the right people doing the right things.
To maximize the value of your company, your exit planning should begin at least two years and preferably five years in advance of the actual sale process. The process includes the same elements as those for Maximizing Shareholder Value, but with some additions, including:
- ensure that your company meets the requirements of strategic and financial buyers
- conduct Benchmarking, Strategic Marketing and complete an an audit of your Intellectual Capital
- identifying potential detriments to value:
– succession management (important to PE firms looking for platform company).
– customer concentration (important to buyers and lenders).
– product concentration (important to buyers and lenders).
– product life cycle issues.
– technological obsolescence risk.
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