Planning an exit when a succession plan isn’t an option

The one certainty any business owner has is that they cannot work forever. If, for whatever reason, forming or executing a succession plan isn’t an option, the owner should consider selling the business as part of an exit strategy.

“Selling a business requires a plan,” says Matt Leuenberger, Commercial Team Leader at Home Savings Bank. “Anything the owner can do to stabilize the business and project a strong future will be beneficial,” he says.

Smart Business spoke with Leuenberger about exit planning when succession isn’t an option.

What does an owner need to know about his or her business to prepare for an exit?

Recognizing what specific strengths of the business could be leveraged by a buyer with additional resources or capacities can help prepare the business for potential sale. Also, understanding the business’s real earnings before interest, taxes, depreciation and amortization (EBITDA) will set appropriate expectations for the owner looking to sell. That could require scrubbing the finances of the company of various personal expenses or extraordinary items that are affecting EBITDA, which will traditionally be used to drive the sales price.

The business owner may also want to consider improving the quality of financial reporting by getting audited financial statements, if they’re not doing so already.

What help can a bank offer to an owner looking to exit his or her business?

Business owners should look for a bank with a wide range of experiences in exit planning and industry contacts, such as potential buyers, successor management teams and advisers who can help with the process.

Business owners who are forming an exit plan can also benefit from peer groups of other small business owners who they can talk with, bounce ideas off and share successes and failures on a wide range of topics, including exit plan implementation.

How would you characterize the acquisition environment today?

The market for acquisitions appears to be strong, specifically for sellers. Bank financing and private equity capital are readily available for acquisitions. The primary drawback to the acquisition market seems to be finding companies willing to sell and then reaching acceptable terms for both sides.

What issues are buyers encountering when it comes to financing an acquisition?

Traditional bank financing will look at EBITDA and the sustainability of the earnings going forward. As prices increase for acquisitions as a multiple of EBITDA for certain industries, it could require additional equity or seller financing.

Depending on the amount of goodwill in the transaction, providing acceptable collateral to secure the bank financing can also be a hurdle.

What are banks doing to help buyers finance deals?

Banks work with buyers to optimize the financing structure and give them flexibility to meet their goals with an acquisition. When necessary, banks look to use available loan or guarantee programs through the Small Business Administration (SBA) to help mitigate their risks. Some of these programs can also help reduce the amount of equity required from buyers.

How would you characterize the level of awareness the market has of a bank’s ability to help with either side of an acquisition?

There is a strong awareness on the buying side because the financing piece is typically a large part of the acquisition process. However, sellers are under-utilizing their commercial banking relationships as they approach a sale event. Through a long-term relationship and thorough understanding of the business, a bank can provide insight as to how buyers are likely to view their business and what hurdles that could create for buyers trying to finance the acquisition.

Business owners should utilize their banking relationships for discussions that are more detailed than financing the next piece of equipment or their line of credit. A commercial banking team has significant experience in a variety of industries. They’ve seen the good and bad in succession plans, acquisitions and sales. Leverage that experience to arrive at the right solution for your business.

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