October 25, 2024 Should I Grow Or Should I Go?

Part II: Deciding if, when and how to exit the business or to stay in – a business owner’s decision making framework.

By Alexander Gordin, EQB

In the last month’s article, “Exit@Maximum – How to exit your business at maximum value and enjoy the fruits of your labor”, I provided business owners with an overview of a successful business exit process. Over the next few months, this column will examine in greater detail each important component of a successful exit preparation process. This article will deal with the business owner’s decision-making process and assessing whether to exit or not, which path to pursue and how to prepare for the exit journey ahead.

GROW OR GO? – TAKE THE TEST. Parting with the business into which you have invested your blood, sweat and tears is a pivotal life moment. A quick assessment, such as the Grow or GO test, will help you get the process started and assess your state of readiness to begin preparing both your business and yourself for an exit

YOUR WHY – the next step is to determine your WHY? Are you looking to exit because the business is no longer fun and you are simply exhausted from the day-to-day grind? Has the business under your direction reached its maximum potential? Do you have personal constraints, other business interests or new passions? Are there health or family reasons? Are you looking for a large lump sum payday and financial security for your family? Are you simply ready to retire and enjoy the finer things life has to offer?

YOUR TIME HORIZON – depending on the type of business and its state of affairs, a typical exit journey may take between six months and three years. Thus, as you plan for an exit, it is not only important for you to manage the expectations, but also factor in and plan for the future unknowns, which may develop down the road and impact your exit. Things like emerging competitive threats, as well as industry, economic, social and geopolitical changes, must be considered for any exit, which is more than a few months out.

WHICH WAY TO GO? – as stated in the previous article, your road to a successful exit will take you down one of four paths(sale to or merger with an unrelated third party (whether private or public), sale to your employees (ESOP), dissolution, or passing the business to heirs/partners ).  Each path will have different constraints, requirements for an exit,  implications on your post-exit finances, pre and post-sale time commitment and your psychological state. For instance, taking your company public will require drastically different level of preparation than that of passing the business on to your heir(s) or employees, with selling to a strategic buyer or to a private equity company being somewhere in between.  You should also decide if you are content to sell the business in its current state, or want to build it up to a level where higher multiples are paid by the potential acquirers? This is not a trick question. To get the same type of business to sell up from circa 3X EBITDA, which is where most small businesses sell for, to an 8X-14X of EBITDA, requires the business owner(s) to implement professional systems and processes, introduce transparent financials, increase sales and gross profits.  This takes a lot of effort, skill, time and money.

HOW WILL YOU GET THERE? – now that you have a sense of the state of your business, and what is needed for you to get to the finish line, ask yourself how you will get there. Do you have the bandwith to take on a whole new project using your internal resources? If you do, will your business suffer, as you focus on exit preparation? Who will help you to prepare and what are your plans B and C if the main plan does not work? What are the risks? What will happen to your executive team and your employees during the pre-exit preparation, as well as post exit? Do you want to put some golden parachutes or executive bonus arrangements in place?  What are the tax implications of selling your company as a whole or doing an asset sale.?  Are you willing to provide owner financing, and to accept rollover equity?

LOOK IN THE MIRROR – Ask yourself again and a gain is the EXIT what your truly want? What would be the fair price you would accept (many businesses owners have unrealistic expectations, which derail deals), many secretly wish to hang on and list their businesses just to get market feedback, but hoping the business wouldn’t sell. Decide what will you do after the sale. What happens if you will be required to work for the new owners as an employee for 6months, a year, three years…? How will you deal with a non-compete situation which will preclude you from starting another similar business for years? If the new owners will not be able to manage the business, what will happen to your “retirement plans” if your will need to foreclose or will have a chance to buy the company back for a fraction of what you sold it for?  Be truthful with yourself about your ability to manage a massive exit undertaking in addition to running your company day-to-day. Are you confident of your ability to close the gaps which were identified during the evaluation process and most importantly commit to the long and arduous journey ahead? Are you willing to invest the money and time necessary to get over the goal line? Take a long hard look in the mirror, as the mirror never lies.

READY, SET, GO – if after going through the above process, you decide to proceed and prepare for an exit, dive in and don’t look back. Create a step-by-step actionable road map with weekly and monthly goals. Hold yourself accountable to either your employees, spouse, (partners), board members, or advisors. Check the plan monthly and make corrections as needed.  Work with your accountants or business advisors to develop a REALISTIC evaluation of your business using several scenarios. Current business value, its value at projected sale date and its forecasted post-sale growth prospects. Review state of your books, intensify financial analysis, have your CFO assess the quality of earnings, prepare the due diligence data room and start placing information in there in an organized and clearly defined fashion for future due diligence. Describe your ideal buyer and your ideal exit and post-exit scenario.  Work with your internal or external advisory team on bringing your business into the best shape (in real estate parlance it is called staging). Staging the business calls for having fully completed corporate documentation and corporate formalities, transparent  and accurate financials, attractive benefit programs, updated safety, labor, tax compliance manuals, review and update of  loan documents and equipment financing agreements, reexamination of all employment contracts and all insurance policies. Where applicable, conduct certified inventory counts, and provide accurate maintenance records for any equipment/assets owned. Prior to putting the business on the market, try to settle any legal, or other types of disputes your company may be involved in. Interview and engage corporate, tax and trusts & estates attorneys. Depending in the size of your business, interview business brokers, or investment bankers to put your business on the market. Identify a good and experienced financial advisor and hire them to begin planning and preparations for post-exit.

Once the above process is complete, you will be in a terrific position to move to the next phase of the exit process.

Read Part I published September 2024

About the Author:
Alexander Gordin is an International Merchant Banking and Risk Management professional with over 30 years of experience providing services in the areas of business advisory and business exit planning, project finance and investment, risk mitigation, capital markets transaction development.  Clients have ranged from US-based and foreign SMEs, foreign governments, state-owned enterprises, to select Fortune 500 cos.

Transaction and negotiations experience in over 30 countries. Extensive experience in aerospace, food security, wireless communications, alternative & conventional energy generation, spent nuclear fuel storage, specialized construction, hospitality, healthcare and franchising industries. Significant experience working in post-conflict countries and emerging markets. Participated as Principal and advised on multiple exits, financing, M & A and restructuring transactions ranging from $1.1 million to $500 million.

Author of the critically acclaimed “Fluent in Foreign Business” book. Co-creator of the proprietary suite of business development, business exit and financing tools including the Exit Quarterback™:

Published, or featured in multiple publications including: Frequent speaker on international finance, foreign direct investment and strategic business development. Featured speaker at numerous conferences.

MBA from the Wharton School at the University of Pennsylvania.

B.S. in Management Information Systems from the NYU Tandon School of Engineering.

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