Part 47: Exit Planning – How Small & Mid Sized Companies Grow

Do you have an exit plan? Most companies have an idea of starting a company to serve some need they are equipped to do. They create a detailed business plan to convert that idea into a reality. If they are successful they build a company that grows and is profitable. As time passes at some point they should consider an exit plan; whether that is passing on the company to their heirs, selling out to an external party, going public, having a staff capably of doing an internal buyout, etc. Doing this is responsible vs. not doing so when the founder passes away having a fiduciary do their best to salvage what they can.

So what are ones exit planning options?

The first step is to have a game plan of where you want to take the company in terms of maximizing its market value. This depends on the time frame the owner has in mind before they want to cash out in one form or another. Either way, exit planning starts with an end in mind and choosing a path to wind up there. It should not be trying to find a way out after you have wound up somewhere and are looking for an exit. This does not mean that one picks the right path and sticks with it, but rather changes it as the situation warrants. Markets change, new ways of doing business arise, customers and employees come and go, so one needs a dynamic game plan. They monitor the outside world, their competitors and their own performance and make changes as needed.

The younger the owner the longer the time frame is. If there are family members’ who are to take over and competent, this presents another option. Excluding that latter situation there are primarily three ways to exit. The first is the default option and least desirable and is done when there are no other choices. It is to wind down the business and go through a phased liquidation, collecting your receivables and maximizing profit as you wind down operations. The next is selling the company to an outside buyer who is looking at future earnings potential, which is primarily reflected in prior year’s adjusted profits (EBITDA) in order to forecast how much money the company will earn under their ownership going forward, where the valuation is a multiple of the EBITDA. The healthier the company in the buyers eyes the higher the multiple and the more potential buyers the more competitive the offer. Finding a good deal is easier said then done. There is another option; it is the internal buyout where management buys the company at fair market value through the internal cash flow generated over a period of time. This is often the best alternative if you hire intelligently. If the company is worth $X this can then be paid out over Y years and is transferred to the key management, but like in a mortgage the equity is yours until the last payment is made, reducing your risk. But there are many complications and tax ramifications for all strategies that must be carefully thought out.

We welcome your questions as to the challenges you face in order to grow.

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