September 13, 2024 EXIT @Maximum!

How to exit your business at maximum value and enjoy the fruits of your labor.

By Alexander Gordin, EQB

You have worked hard to build your business.  It is your baby and an integral part of you. Being an entrepreneur is a solitary, difficult journey, and at some point, you may want to let go of your business in order to build another one, or enjoy the finer things life has to offer: financial security, time with family, travel, a beach-front home, prime seats at your favorite event, fine jewelry, an exotic fleet of cars, funding your favorite charities, or regular passive income.

Exiting a business successfully and at the highest value, is a complex process. A very different skill set is needed to build and run the business, versus preparing to exit the business. Many founders, CEO and COSs excel in starting, operating and building their companies. Yet, when it comes to building a sellable and highly valued business, many either neglect the strategic exit planning, as they fight daily fires, or are simply unfamiliar with the process.

To be sellable. the business needs to be in shipshape, with proper systems and controls installed.  Sales, marketing, financial, compliance, operation, service departments, HR, should all work in unison to provide visibility of the future revenues and profits. Strong and happy management and employee teams must be in place.

You, as the owner, need to be mentally ready to go through the exit preparation, due diligence and post exit phases. To succeed and to win, it is important from the beginning to assemble and deploy, a specialized Exit team consisting of capable and reputable attorneys (corporate, tax, trusts and estates), a trusted CPA team, valuation professionals, business intermediaries, experienced benefits consultant, an ace insurance professional and a strong financial advisor, As the cherry on top of the cake, a PR specialist familiar with your industry and focused solely on developing an exit at maximum value should be put in place. Although each team member will only be compensated for their specific role and at the appropriate time, it is important that the team is brought together in the beginning of the journey, is familiarized with the timing, and objectives of the planned exit. The team should be kept appraised on the developments throughout the process

There are only four ways to exit a business:

• Sale to or merger with an unrelated third party (whether private or public)
• Sale to employees (ESOP)
• Dissolution
• Passing the business to heirs

Regardless of the chosen path, it is vitally important to approach the process strategically and start planning months, or even years before the consummation of the exit transaction.   A number of vectors need to be developed and managed simultaneously: bringing business’ corporate structure, financials, tax, governance, legal and compliance procedures, HR, benefits, sales, marketing, PR/GR processes up to speed. Other vital focal points should include developing strong recurrent cash flows and earnings predictability; planning capital budgets with proper time horizons and if warranted, expanding regionally, nationally or internationally.

Your company’s financial statements should reflect the improved state of your business and you and your CPA need to start poking holes in the numbers and addressing any weaknesses, which may be there. 

Developing exits for businesses of all sizes is challenging. However, things get even more complex if an exit is particularly large, or the business being sold has complex transfer pricing issues, or international subsidiaries.  In such cases the importance of reputable and competent trusts and estates, or international tax professionals cannot be overemphasized

Every company owner seeking to exit (or even those who are not yet ready) should start working with their trusts & estates attorney and insurance professionals to implement things like durable power attorney, medical power of attorney, a will, a succession plan, keyman insurance policies, executive bonus compensation, more attractive benefits for the employees. These rather inexpensive, or even no-cost items, will immediately add value to the business and will allow you to ease into the exit process gradually.

Compliance procedures – a company well-prepared for an exit will have its HR and legal policies well-documented.  FCPA manuals, sexual harassment, safety standards compliance, employee manual etc. should be developed six to twelve months prior to actively starting the exit process. These procedures will provide additional liability protection and definitely increase the company’s value in the eye of prospective buyers.

Buyer cultivation – as soon as you decide to plan for an exit and determine whether it will be an asset, or a stock sale, you should select the target scenarios for your company as plans A and B. Afterwards, you need start focusing on the business valuation and on developing your buying audience. Your Exit team should provide you with market analytics on the comparable valuations, past deals, industry trends, and most importantly prospective buyers. Once the buyers have been identified you and your team should work to get on their radar and keep them in your orbit, as your company continues to operate.

Exit procedure – six months prior to the target transaction date, you, together with the exit team should set up due diligence data room, fill in all appropriate documents, review market conditions, conduct an internal valuation and prepare for negotiations. Regular meetings with the Exit team should be set up to prepare the tender solicitation to be sent to the prospective buyers. Once the offer(s) for the business are received, the Exit team should support you in evaluating the terms and conducting negotiations.

In parallel, you should start to work with the tax and legal professionals to set up post sale tax and wealth preservation structures and start interviewing private bankers, life/long-term-care insurance providers and wealth managers. 

Once all the items on the closing checklist have been checked off, the team will work with you to prepare for the life post-exit and move to close the transaction.

Let’s imagine the day after you have just sold your company for tens or hundreds of millions. After the closing dinner celebration, a new reality begins. It will include such pleasant, yet challenging issues of how to set up wealth management structures, create financial legacy, explore charitable giving.

The new reality will also include less pleasant, but equally challenging issues of optimizing taxes, dealing with being an employee rather than the boss, surviving a non-compete and planning your next business adventure, or if retired what to do with your new found freedom so not to go postal.

In the upcoming Industry Today issues, I will focus in-depth on each of the above-mentioned exit-related segments. I will interview multiple experts who are part of successful exit teams and focus on uncovering important nuances in each segment of this complicated, but potentially highly rewarding journey. Let the Exit journey begin.

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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