This guide to exit strategy planning is the result of Growthink’s 20+ years experience helping companies develop successful exit plans.
The guide starts by explaining what a business exit strategy is. It then explains the types of exit strategies available to your company.
It then discusses the keys to successful exit strategy planning. In this section, we spend a considerable amount of time going through the 20 ways to maximize the value of your company to realize a successful exit.
Finally, this guide provides helpful tips regarding how to create an exit strategy business plan for your organization.
What is a Business Exit Strategy?
A business exit strategy is the plan that a business owner or executive creates and follows to liquidate their stake in a business, ideally at a significant profit.
A successful business exit strategy requires careful planning and should be periodically revised to best reflect the current business conditions.
Types of Exit Strategies
To ultimately build an effective exit plan it’s important to understand the ways you can exit a business and which type of exit aligns with your goals and values.
For example, if your end goal is generating money and personal wealth, then selling your business to a competitor or a private equity group might be a viable exit plan. However, if you are more attached to your business’ legacy and wish to see it operational even after your exit, then selling to current employees or family succession planning might be exit strategies worth exploring.
Below are the six core types of exit plans and strategies, organized into two core categories: A) Selling Your Business and B) Other Business Exit Strategies.
A. Selling Your Business
There are three main audiences to consider when selling your business: another business, a financial group and employees. When evaluating the sale of your business, gauge the attractiveness of your business from the perspective of potential buyers.
A solid reputation, customer base and track record of growth are some factors that make a business appealing to buyers. Other factors could include strong cash flow, patented intellectual property or niche expertise. Note that these factors are discussed in the “Keys to Successful Exit Strategy Planning” section later in this guide.
- Another Business (or a Strategic Buyer): Businesses acquire other businesses for a variety of reasons. From a buyer’s perspective, an acquisition is often the quickest way to grow and/or diversify a business. It is also a surefire way to eliminate competition. For these reasons, valuations in strategic acquisitions are often highest.The drawback to this path is that most companies do not have an active mandate to acquire another business. A company’s owner may first need to be convinced of the idea of an acquisition generally before entertaining the specific opportunity to purchase your business. He or she may then need to obtain financing to complete a transaction. Both of these elements can slow your exit process.
Therefore, when exploring this path it is important to plan ahead and identify firms that could be potential acquirers by keeping up with transaction activity in your industry. Keep a look out for firms that are actively buying other companies and position your business in a way that appeals most to them. This will maximize your chances of receiving an enviable acquisition offer from a company that is prepared to buy.
- A Financial Buyer: A financial buyer refers to an individual or group, like a private equity firm, who is primarily interested in the cash flows your business can generate post-acquisition. Financial buyers’ sole business activity is the buying and selling of companies, so these buyers are prepared to efficiently and effectively evaluate a business and have capital in place to quickly execute a transaction.Given their valuation approach and goal of future cash flows, financial buyers are typically looking for relatively high historical operating profits ($3 million at a minimum). Typically private equity groups value a company based largely, if not exclusively, on a multiple of past operating profits. These multiples may or may not take into consideration the growth opportunities you see for your business and so you may not see the same valuation as a strategic buyer.
- Your Employees: Selling the business to employees is another exit strategy to consider. The advantage of this strategy is that you are transitioning the business to people who are well-versed in it and have a vested interest to see it thrive.If you are structured as a corporation, you can create an Employee Stock Option Plan (ESOP), which allows employees to vest ownership in your business. When you are ready to exit, the company then purchases your shares from you and redistributes them to remaining employees.A similar option is establishing a worker-owned cooperative. In this scenario, employees invest personal capital into shares of the cooperative. For this to work it is essential that you foster a participatory culture in your organization and be mentally prepared to stay on until the transition is complete.
Other Business Exit Strategies
If you do not plan to sell your business, the following are other exit options to consider.
- Family Succession: This exit strategy involves transferring the mantle of leadership to the next generation in your family. This strategy is popular with owners who wish to see their legacy continue. The advantages of family succession include the ability to choose a successor of your choice and groom them. It also allows for the business owner to retain a certain level of involvement.The success of this strategy often hinges on the personal attributes and professional skills of the new successor. Their commitment to the family business and the quality of their relationships with other employees are also critical factors.
- Asset Sale: This business exit strategy involves shutting down the entire business and selling some or all its assets. For this strategy to be profitable the business needs to have certain value-adding assets it can sell, such as land, building(s) or equipment.
Compared to a stock sale, asset sales typically involve limited negotiations. You also do not have to worry about the transfer and transition of ownership. The negative obviously is the loss of the business you built.
- Taking Your Company Public: Another exit strategy you may consider is an Initial Public Offering (IPO). We mention this last since it’s only relevant to a tiny portion of companies. An IPO involves selling your business in public markets like the New York Stock Exchange (NYSE). IPOs receive wide media coverage but are not very common. This is because they are very expensive and laborious to undertake. Every IPO requires thorough financial, operational and staffing reports among others which can be very costly to produce. Incurring such costs is not feasible for small to medium-sized businesses; hence this exit strategy is not practical for many organizations. If you do manage an IPO then the pros are instant popularity as IPOs are usually quite a hyped event. You might even get lucky and have your business valued highly on the stock market leading to your stock value appreciating exponentially.
Keys to Successful Exit Strategy Planning
The key to successful business exit planning involves just two steps: 1) determining how strategic or financial buyers will value your company, and 2) maximizing that value.
1. Determining How You Will/Might Be Valued
As discussed above, if you seek a financial buyer, they will value your business based on your financials, cash flow and future growth prospects.
Strategic buyers, which nearly always pay more money than financial buyers, and thus should generally be your focus, will value your business differently.
The best way to identify how they will value your business is to:
- Research acquisitions in your market (via trade journals, Google searches, etc.)
- Determine what metrics will you be primarily valued on? Ideally in your searches, you will see what attributes were mentioned in articles discussing the acquisitions. Did they mention the acquired company’s revenues, # of subscribers/customers, market share, EBITDA? Whatever metrics are mentioned will be key value drives.
- Identify factors multiple strategic buyers would value, such as new products, a distribution network, intellectual property (IP), unique location(s), financial savings, better systems/processes, permits, etc. These factors are discussed in more detail in the next section.
2. Twenty Ways to Maximize the Value of Your Company
To help in your business exit planning, we have identified 20 ways to build and maximize the value of your company. Each of these concepts are discussed in detail below.
1. Build Synergistic Value
Synergistic value is when you and an acquiring company together have more value than the two separate companies.
So how might you create synergy? Perhaps your products or services could be sold to the acquiring company’s large customer base?
For example, maybe the acquiring company sells parts to bicycle stores and you have a new part that is also sold to bicycle stores. But perhaps they sell to 5,000 bicycle stores and you only sell to 500.
By getting your part into the additional 4,500 stores, they may be able to increase your sales tenfold. That’s huge synergy.
There are many other areas of potential synergy. Perhaps you have a unique core competency that can be leveraged by the acquiring company. Maybe you’re an incredible Internet marketer and the company that wants to acquire you is not great at internet marketing. And by leveraging your unique marketing skills they could dramatically grow their business.
So think through the synergy fit. Think through what companies might want to buy you at some point and what synergistic value you could bring to that organization.
2. Diversify & Lock Down Your Customer Base
The next thing you can do to maximize the value your company is to diversify and lock down your customer base.
There’s a threat to your company’s value when you have a concentrated customer base, which is few customers or customers representing 5%, 10% or more of your sales. That is risky because if one of your bigger customers or multiple big customers leave, your sales and profits could drop precipitously.
Another big risk is when customers have personal relations with the owner because you (the owner) would be lost after the acquisition. Or if customers have personal relationships that are too strong with a salesperson and that salesperson leaves your company and the customer leaves us with them.
So what are the solutions to these threats?
First, diversify your customer base. You need to be thinking about diversifying your customer base so that you don’t have the risk of a big customer or more leaving.
Secondly, if possible, secure contractual sale agreements such as long term contracts and licenses to ensure ongoing sales from customers. The ideal here (and lowest risk to buyers) is contractually recurring revenues.
3. Diversify Vendors
The third thing you want to do to maximize the value of your company is to diversify your vendors. Consider what would happen if a key vendor raises its prices or goes out of business. Would your business be in trouble?
Acquirers are going to ask what happens if something happens to one of your vendors. Likewise, you need to be asking this question of your business right now.
So what are the solutions?
Finding and using multiple vendors. Importantly, you’re probably not going to generate more revenue tomorrow because you spend hours looking for multiple vendors. But it’s going to make your business stronger. It’s going to remove risk from your business and make it more valuable to acquirers.
4. Put “Successor” Clauses in Customer (and Partner, Vendor/Supplier, etc.) Contracts
The next way to maximize your value is to put successor clauses in your customer, partner and vendor contracts.
Successor clauses ensure that your key contracts survive changes in ownership so the buyer receives full value from them. Many contracts become void if your company changes ownership and you obviously don’t want that. So when you sign contracts with customers, vendors, partners, etc., make sure you have clauses that the contract survives the acquisition of your company. If not, this could significantly reduce the value of your company.
5. Bolster Your Senior Management Team
The next way to maximize the value of your company is to bolster your senior management team. You need to make sure your business can run without you because then there’s less risk to the buyer.
Doing this also means that you might need to stay with the business for less time after you sell it. So bolster your senior management team, and make sure that you’ve hired and trained quality people that can run the business for you.
6. Bolster Your Middle Management Team
The next thing to boost value is to bolster your middle management team. Once again, you need more trained people so the business can run without you. This lessens the risk to a buyer.
Having a trained middle management will help ensure a better transition to the new owner. There’s always going to be a transition period where you’re integrating your business with the acquirer’s. The more trained staff you have makes it much easier for the acquirer to buy your business and have the business run as usual from the get go.
7. Build Management Team Solidarity
The next value-building strategy is to build management team solidarity on a day-to-day basis. To succeed with the day-to-day operations of your business, your management team must have the same company vision and goals as you.
During the sales process to an acquirer, the same holds true. This is because buyers will interview your team members individually during the due diligence phase to make sure there is a cohesive vision/direction among your key employees.
8. Improve the Quality of Your Team
Will acquiring your team add significant value to the buyer? How unique is your team? And do you have unique talents?
As you can imagine from these questions, your team can add a lot of value to your company.
To begin, if your team has unique technical capabilities, great customer service people, etc., it could have great value to an acquirer. Likewise, it’s extremely valuable if your team have a track record or ability to do things really well on an ongoing basis, such as:
- Conduct R&D to come up with new products
- Bring new products to market
- Provide exceptional customer service
So, think about what your team is great at, and work to make them even better.
9. Build Brand Value
The next way to maximize the value of your company is to build your brand. The value of your brand and your reputation can be considerable. A well-known brand results in recognition which often equals sales for the foreseeable future.
So building your brand gives you a lot of recognition, which has a lot of value. Building your brand also gives you trust. This is why a lot of brands are acquired.
So think about the value of your brand. How can you build your brand to make it more well-known?
10. Build Intellectual Property
Intellectual Property (IP) can provide significant value. IP includes your patents, processes, copyrights, trademarks and service marks and trade secrets.
Sometimes your IP value can represent the entire purchase price of your company.
Think about intellectual property and how you use that IP to create real value for your company. And ideally how it can provide even more value to an acquirer.
11. Improve Your Culture
The next way to build value is through your culture.
Zappos is a great example of a company that built a great culture. And as a result, Amazon acquired it for over a billion dollars.
So you think about how you can build a great company culture that allows you to build a solid company and be acquired for a lot of money. Importantly, Zappos’ culture became a threat to Amazon and Amazon purchased the company because of this threat.
So consider this question: can your culture positively “infect” the culture of an acquirer?
It’s one thing to build a great culture, but think about if you can create a great culture that when acquired, is so great and strong that you can “infect” the parent company that buys you with it. That’s a great way to build value.
12. Build Back-Office Infrastructure
You can also build value through your back-office infrastructure.
Your back-office infrastructure includes all the departments that support your revenue generating areas, such as IT, human resource, accounting, legal, etc. A solid back-office ensures your business will continue to run smoothly without you and after an acquisition.
This is really important to financial buyers because financial buyers want to see your business grow as a standalone business. They’re looking to acquire your business, grow it for four to eight years, and then sell it.
A strong back-office infrastructure can also be important for strategic buyers. They will care if you have strategic or competitive advantage in any of these back-office areas. If not, they’re going to dissolve or integrate your back office into their own departments.
13. Build Revenues, Subscribers/Customers &/or EBITDA
Building revenues, subscribers, customers and/or EBITDA is an obvious way to really build value in your company.
Subscribers and customers are assets that are highly valued and bring future sales and profits.
And revenue and EBITDA are key financial measures that show your success and can be used to estimate the price at which acquirers might purchase your company.
14. Acquire Great Locations
Another way to maximize your value. Is by making sure your location(s) is/are very strong.
By locking up the right locations, you can add a lot of value to your organization.
For example, Rosetta Stone has kiosk lease agreements at airports throughout the world. That’s really valuable…if an acquirer wanted to buy Rosetta Stone, they would instantly gain visibility in airports throughout the world.
Likewise, when Fedex purchased Kinko’s, it instantly gained hundreds of well-placed retail locations.
15. Build Your Distribution Network
Another way to maximize value is through your distribution network.
Distributors, resellers and/or affiliates are individuals and organizations that sell their products and services for you. That’s a huge asset that can maximize your revenues and profits, and which could do the same for your acquirer.
So, the question to ask yourself is: what can you do to gain a large distribution network that will increase your revenues and make you a more attractive acquisition target?
16. Improve Your Product/Service Portfolio
The next way to really build value in your business is to focus on your product and service portfolio.
Think about the products and services you currently offer. Are they unique? Can they be leveraged by an acquirer? Do they represent a threat to an acquirer’s business?
Think about what new products and or services you can build to develop value. More products generally equal more revenues, more customers, more intellectual property and less vulnerability.
The more products you have, the more you could cross-sell your current customers, upsell them and the less vulnerable you’d be to to a competitor who launches a similar product to yours.
17. Show Financial Savings
The next way to maximize value is through financial savings. Do you have economies of scale in certain areas? Do you do things so often that you’re able to get your costs down on a per unit basis. If so, such cost savings could be valuable to an acquirer.
18. Create Systems & Processes
Likewise, do you have any processes, systems and ways and ways of doing business that save money? These will all be valuable to your current business and to acquirers.
Likewise, systems and processes can add tremendous value to your business right away. And quality systems and processes are valuable assets. They allow you to perform with precision and consistency. They allow you to perform at lower costs and gain efficiencies and allow you to quickly and easily train and integrate new team members.
So focus on building quality systems and processes.
19. Create a Great Company Website
Your company website can also be a source of value maximization too.
Not only might your website, based on your brand, attract visitors. But, if you’ve invested in SEO or search engine optimization, you might organically rank for many keywords. If your site is SEO optimized, an acquirer might be able to use it to rank for additional keywords that have significant value to them.
So it’s worth building a great website and optimizing it for search engines.
20. Achieving Government Hurdles
Achieving/overcoming government hurdles can add significant value to your business. Getting permits, zoning approval licenses, regulatory approvals and certifications can be extremely valuable in the short-term to your business, but also really valuable to an acquirer.
Doubling the Value of Your Company
Doing everything listed above can exponentially increase the value of your business. In addition, you can literally double the value/purchase price of your company by expertly executing the sales transaction:
- Presentation: how you position your company and support your valuation
- Professional sales process: getting more buyers, revealing information at right times, etc.
- Negotiating and closing skills: getting the right deal done
Creating Your Exit Strategy Business Plan
The process of creating your exit strategy business plan includes the following:
1. Create List of Potential Acquirers
If you are interested in being acquired at some point in the future, identify companies you think would be ideal.
2. Determine How You Will/Might Be Valued
Go through the 20 value maximization concepts presented above and identify which of them would be most valuable to each potential acquirer.
3. Create Your Strategic Plan
In your strategic plan, identify each of the ways you will build value (e.g., develop new systems).
Document the timeline for creating each new asset along with the financial requirements and the staff members who will lead each initiative.