The pandemic has convinced more and more company owners that it’s time to bid their business goodbye. Some have reluctantly closed their doors, but many others are implementing their exit plans early, seeing opportunities to sell a company in a well-positioned industry for greater personal or generational wealth, or even realizing that life is short and retirement should be longer.
A forward-thinking, proactive business owner has been planning or at least mindful of their exit strategy since Day 1. But it can be an easy target to compromise, lose track of or deprioritize in the much more immediate day-to-day demands of running a company if you don’t establish mechanisms that reinforce the eventuality of your exit.
“Even if you’re just starting out, planning with the end in mind is what we teach our clients: You should be thinking about your last day as soon as you put that first dollar bill you’ve made in a frame and stick it on the wall,” says Raymond Lamboy, CEO and president of the Latin American Economic Development Association, a Camden-based nonprofit that offers professional advice to area business owners. “Knowing your long-term plan helps you build a good, strong business from the get-go. If you’re putting the right finance, development, and sales and marketing systems in place, they can make your businesses more marketable and more valuable than one that is not as well organized.”
Exit strategies are wide-reaching, living business plans that account for and adapt to variable elements like chains of command, valuation, HR, operations, client books, professional relationships, family expectations, employee retention and life’s unexpected curveballs. Proactively managing all the moving parts of an exit plan ensure that a transition of ownership goes as smoothly as possible for all parties’ sake.
“Our advice would be to start planning your exit 1-3 years before your ideal time to sell,” says Matthew Jack who, like his father David, is both on the leadership team for Exit Planning Institution’s (EPI’s) New Jersey chapter and serves as a financial advisor with Morgan Stanley’s wealth management division. “We also cannot stress enough how important it is to work with the right professionals who can help you move the ball past the goal line.”
While the ways a successful exit strategy can be created and implemented are dependent upon a number of variables, there is some common wisdom guiding the way no matter the individual circumstances. For one, you’ll always want to have as much agency in the process as possible, and looking ahead is the easiest way to secure that peace of mind—and going out on a high note often ensures the biggest payout.
“If possible, planning is the best way,” says Anne Caruso, a broker with The Loyalty Business Brokers. “Some businesses owners are like, ‘Why would I want to sell my business when I’m doing so well?’ but that’s exactly when you want to sell! You’re going to get the most back for your business when it’s performing well.”
As the past two years have starkly illustrated, a global pandemic permeates every nook and cranny of ordinary life. It has certainly impacted how and why people part ways with a business they’ve invested so much time and energy in, and the lingering effects will remain no matter the organization or industry.
“In the short term, I’ve encountered a lot of people who exited their businesses who weren’t quite ready to exit their businesses: They weren’t prepared for something like COVID to hit, they’re not able to ride it out, or they’re getting close to the end of their career and saying that now’s a good time to cash out,” Lamboy notes, adding that the past two years have made people scrutinize their next steps a little more closely than before.
No matter the specifics of your goal or the external societal forces at play, you need to consider how multidisciplinary an exit strategy really is, which means relying on expert advice from numerous parties, especially trusted financial experts and advisers.
“Identifying whether the sale will be to a third party, a family member, a competitor or to current management can have a wide range of different tax consequences,” explains Matthew. “Owners should be consulting their CPAs as well as their financial advisors to identify what approach will be most efficient based on their individual circumstance. As we know, it’s more about what you keep from the sale of the business compared to what it’s sold for.”
But different owners will always have different goals. One might have a second-in-command who’s ready to assume control at a moment’s notice. They might want to sell the organization for a profit. In the case of a family business, there might be a relative or younger generation to pass the baton to. Or a key leader’s departure might be accelerated by extenuating circumstances that create a new retirement timeline out of necessity—think a sudden incapacitation, an unexpected death in the succession line or pandemic-shifted priorities.
Each scenario does come with its own set of best practices. You’re more likely to be worried about positioning the company for its maximum valuation if you’re selling it to fund your retirement or next venture, but thinking about your company’s attractiveness as an asset might be a beneficial mindset in helping you cast an objective eye on something you’re deeply invested in.
“There is that sense that ‘This is my life’s work, this is where I planted my flag for so many years,’ and people can really struggle with stepping off that stage,” says Lamboy.
“It’s human nature, especially if the current owner is also the founder,” agrees Nick DellaRova, COO and principal consultant at CLM Advisors, who notes that since “roughly 99.9% of business owners” overvalue their businesses’ actual worth, it’s important to provide objective valuation metrics. “When it is time to get serious about transition of the business, we lean on sound, well-established accounting practices and a realistic understanding of the market for their companies.”
There are numerous ways to ensure you’re getting the biggest payout possible. As David Jack explains, “There is a calculation often used by valuation professionals where they’ll typically look at either the current revenue or profit of the business, and then multiply that by a factor to arrive at a potential valuation.”
David notes that non-monetary and non-physical assets can give smaller companies an unexpected edge: “Intangible assets often turn out to be the hidden value drivers of small to medium sized enterprises. This is crucial to their competitive advantage, and thus to their future earnings.”
With COVID creating an unprecedented business landscape, the recent past has demonstrated that even the most painstakingly thorough exit strategy can be rendered irrelevant by major life events no one saw coming. A pandemic is an extreme example of those sudden disruptions EPI has long described as “the five D’s,” which can do anything from expedite an exit’s timeline to force a selling owner to accept a less-than-ideal deal.
“An owner being forced to sell due to unforeseen circumstances, such as death, divorce, disability, disagreement or distress removes all of the control from their side of the table and will likely allow an interested buyer to get an upper hand and offer a discounted price on the deal due to the time-sensitive nature of the sale,” David says. “The owner may have no other option than to take the discounted offer because the alternative is they walk away with nothing.”
While some issues may be unavoidable, there are common pitfalls that can be sidestepped with a little bit of forward thinking as Matt notes that “the old adage of failing to plan is planning to fail has never been more pertinent.”
But if there’s any prevailing advice to keep in mind no matter what, it’s that it’s never too late to get proactive and get organized—and that there are pros who are here to help.
“Even if your intent is to sell ‘someday,’ you should keep tight books and records as though you are selling next month,” says DellaRova. “Among small businesses, the most common impediment to maximizing value is the quality of the financial statements. If you have not put enough time and effort into your accounting, it will bite you in the end because a sophisticated buyer will perceive more risk and offer less money. Trying to pull it all together in just a year or two before a sale is unrealistic and expensive.”
“Transitioning out of your business can be quite the overwhelming process,” adds David. “Our best advice would be to work with professional advisors who understand the nuances of how a business sale works and can help connect you with the appropriate resources at each stage of the process.”
Working with a third party can be intimidating at first: Caruso not only helps clients with their own exit strategies, but also went through the process when she and her husband sold their company a couple years ago. She knows firsthand how important it is for an outgoing owner to trust the broker or advisor walking them through a complicated, emotional process, and how the promise of privacy goes a long way in getting optimal results.
“Confidentiality is a big issue for sellers,” she says. “They’re giving you their [profit and loss] statements and tax returns, they worry the business will be impacted if customers, clients or employees find out they’re selling. Signing a non-disclosure agreement tells clients you’re not going to discuss the information you’ve received.”
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Published (and copyrighted) in South Jersey Biz, Volume 12, Issue 5 (May 2022).
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