Plan a profitable exit Featured

8:00pm EDT June 25, 2008

Many baby boomers are now ready to taper off, slow down, travel and do all those things that have been on the back burner for the last 30 years. Often with a sense of urgency, and a self-imposed deadline (such as age 60), an executive will scrape together a fast strategy to retire. Emotion, rather than solid planning, drives the business sale. Once a transaction is complete, there’s no way to get back what was sold. An owner may feel displaced. What’s next?

“Exit planning is a long-term process, and owners should not make these decisions precipitously,” says Barry Worth, a member responsible for mergers and acquisitions at Brown Smith Wallace LLC. “They should line up their goals and objectives and seriously consider how they will spend their time once the business is sold.”

Smart Business spoke with Worth about exit strategies and how to address and prepare for life after the business.

Before you begin preparing for a sale, what lifestyle issues should be addressed?

The first questions to ask are: Have you thought about how you want to live after the business is sold? What will you do when you no longer go to the office every day? How will you maintain an income to continue living the way you prefer? If you want to travel, you may have plenty of time once the business is sold, but will you have the resources to make it happen? Start the exit planning process by outlining goals and objectives, which leads into wealth and financial planning. Most owners fall into two camps. The first group has thought seriously about the business not being a part of their lives, and they are confident that they have many interests or other business ventures to pursue. The other group isn’t so sure what life will be like without the business, and they don’t know how they will replace their incomes.

What about owners who want to exit but aren’t prepared to completely pull away?

An owner can recapitalize the business and get a second bite of the apple, so to speak, by selling a majority of the business to a buyer and maintaining a minority share, still working in the business’s daily operations. Many times, this buyer is a private equity group or other strategic investor that plans to grow the business and sell it down the road. This arrangement can be beneficial for owners who plan to exit in the near future, still want a revenue stream from their business and some involvement, but no longer want the financial burden of investing in the business. The benefit for buyers is having the former owner involved in management. Eventually, the private equity group will sell the business and both parties will move on profitably.

How do you prepare for a sale?

While this process is an entire topic in itself, analyzing and valuing a business to prepare it for the market is a critical part of an owner’s exit plan. Generally, an owner has one shot at maximizing his or her return, and it’s usually on the first go-around. Therefore, the owner and advisers must analyze the business with the goal of presenting the best package to potential buyers. This means evaluating personnel, operational efficiency and record-keeping processes. Every component of a business is raked over with a fine-tooth comb, and areas that need polishing are tended to before the business is listed for sale. An owner’s greatest asset is his or her business. When exiting, every weakness will subtract from the owner’s take-away value.

What about ‘Plan B?’

An important part of exit planning is addressing contingency planning. What happens if the owner’s post-exit financial plan is built around a certain number that the best buyer simply will not pay? There must be a ‘backup’ number — a second best. While a business valuation is a key indicator, the market puts a value on businesses and it may not match a formal valuation.

Who is involved in exit planning?

Exit planning is truly a team effort, and it generally involves an accountant, attorney and often a trusted business confidante and investment banker. After the owner identifies goals and objectives, responsibilities are divided among team members. The process is no different than a sports game. Each player’s individual strength and contribution leads to a team win. In an exit plan, each adviser plays a key role in carrying out the strategy and, eventually, obtaining the goals and objectives of the owner. That said, someone besides the owner should play quarterback and direct the exit planning process. If a third party is keeping score, the owner is more likely to stay on track. Otherwise, forward-looking plans are easily shifted to the back burner as the owner puts out daily fires.

How does the economy affect the acquisitions market for owners looking to sell?

In today’s economy, the credit crunch certainly introduces challenges in completing smaller deals, but there is a strong market for solid companies that are well organized. Acquisitions are, frankly, the quickest way to improve market share. Owners who carefully prepare their businesses for sale, and understand what they must get out of the transaction to live the lifestyle they choose, may discover there are plenty of buyers ready to make a move.

BARRY WORTH is a member responsible for mergers and acquisitions at Brown Smith Wallace LLC. Reach him at (314) 983-1202 or