Planning for a Successful Exit – No Remi, Not that Way!

Remi is TCV's Chief Comfort Officer

By TCV Growth Partners

Far too few business owners have thought about how they will exit their business when the time comes.  For successful business owners, their business is their passion and leaving it is unthinkable.  But then something happens - suddenly they find they need to leave their baby behind.  Maybe it’s the wife who wants to see Europe aboard cruise ships.  Hopefully it won’t be an illness that forces the exit. But eventually it will happen and all too often very little thought has been given to a successful exit – one that maximizes the value of the business.

Yes, the whole point of exit planning is to maximize the value of the business and, if possible minimize the taxes paid on the proceeds.  So what to do?

First, it’s never too early to prepare for an exit  Develop and document systems, grow the organization to ensure the company can operate without your day to day involvement.  Be sure to maintain all legal documents and contracts in readily assess-able files.  As you grow the company, ensure it is financially stable with growing profitability.  Have a plan for growth and execute on that plan.

Understand the business sale process  The process of selling a business involves stages that include  the following:

• Get your financial house in order - Ensure that three years of financial statements are able to withstand an audit.  All too often a preliminary agreement on a sale price is drastically lowered in the due diligence step because financial statements are not accurate or accounts do not reconcile.

  
  

• Get necessary documents in order and ready for due diligence.  In addition to auditable financial statements, be sure to have Articles of Incorporation, bylaws, intellectual property, licenses, employee agreements, leases and if applicable contracts with customers.

  
  

• Assemble a team.  Your team will include a seasoned attorney who has reviewed business sale contracts and the all-important Letter of Intent, helped with negotiations, and provided insights into the process. Other team members will include your CPA firm and an Investment Banker (larger transactions) or Business Broker (smaller transactions) who can help find suitable buyers and who has experience working with attorneys.  A valuation expert will help you establish a viable business valuation model and provide a starting valuation. An overall business advisor is a great idea to coordinate the efforts of your team and keep you on track.

  
  

• Value the business. Again, you can hire a Certified Valuation Analyst or have your business advisor help you with creating an applicable business valuation model (Discounted Cash Flow, Comparables, EBIDTA multiples, or Asset based valuation). Valuation is about negotiation and you want to have a strong case to negotiate from.

  
  

• Find and screen potential buyers.  Yes, you can shop your company yourself but this can take enormous amounts of time while the professionals already have lists of potential suitors. More importantly they will have screened the potential buyers to ensure they are capable of executing a purchase. They will already know if your business is suitable for a Private Equity Group (PEG) or a strategic buyer.

  
  

• Negotiate a deal.  Deals can be tricky with many possible components such as an earn out, cash closing, possible claw back clauses, your continued service for a period of time, Non Competes and more. So having an experienced attorney on your team is essential. Of course, valuation is very dependent on negotiation, so the CVA or Advisor, working in conjunction with your attorney is essential to help negotiate the best price and limit contract clauses that can impair a deal after it closes.

  
  

• Letter of intent (LOI). Once you have a handshake deal based on an agreed valuation the buyer will provide a LOI. Again having a good business advisor and an experienced attorney is critical. Be sure the LOI is non binding.

  
  

• Due Diligence. Here is where the buyer will try to find reasons to reduce their purchase offer.  They will try to find faults with your financial statements, your contracts, and others like Intellectual Property that is close to expiration or contracts with customers that are have debatable terms.

  
  

• Final Negotiation. If your books are squeaky clean and you have all of the needed documentation (contracts, leases, etc.) readily available, this should be an easy step. Otherwise, expect the buyer to try to significantly reduce their price via their due diligence process.

  
  

  A last word of advice – It’s never too early to get your business ready for your exit! If you need help, feel free to reach out. We have connections to the resources you will need and will be happy to oversee the entire process.

  Doug@TCV-Growth.Partners