As soon as entrepreneurs buy or start up a business, they should have an exit strategy.
Reality, however, is that many business owners only realize this much farther down the road — say, about the time they realize they don’t want to run a company every single day for the rest of their lives.
Trekking in the Himalayas, anyone? Safari in Africa? Or perhaps time to run in the sprinklers with the grandchildren. Whatever life holds, business owners need to prepare.
“Planning Your Exit: Transitioning Your Company Successfully” was fourth in the Investor Ready Seminar Series presented by the Peak Venture Group and the Colorado Springs Technology Incubator.
“We’re definitely in a buyers’ market,” said Austin Buckett, mergers and acquisitions manager for BiggsKofford. “More deals are done with upfront, detailed due diligence than before.”
But it’s still possible for sellers to garner substantial return on investment, although not via liquidation — “that’s not something you want to do,” he said.
Different exits create different results and value.
Public offerings were popular during the late 1990s and early 2000s, Buckett said, “but it’s very complex and costly — you have to be a big company to go down that road.”
And employee share option programs or successions — selling to family — do not create as much value as selling to a third party.
The two most common exit strategies are sales to strategic buyers or sales to financial buyers.
Strategic buyers are looking for companies that add synergy and value to their existing operations, whereas financial buyers, as the name implies, are interested in a company’s cash flow and equity as a long-term investment.
Going to market
Usually, business owners need one to three years to add value to their company and prepare it legally and financially before selling.
Loren Lancaster, managing director of Core Capital Group, said business owners need to remember they are trying to sell a business — it’s not a simple matter of taking the first offer or, God forbid, telling people you want to sell, thereby losing employees, vendors and clients in the process.
The “universe” of potential buyers is “much greater” than the number of people whom you know or those who know about your business.
“You have to create people who are clamoring for your company in your market,” Lancaster said. “There’s a well-known methodology and dance — a well-established process, that people expect to see when they look to buy your business.”
Delivering the right materials, at the right time, with the right message shows a seller is working with professionals.
“If you don’t, you’ll tip your hand that you’re an amateur,” he said, “and they’ll start licking their chops.”
Positioning a company not only includes “courting” buyers, marketing, research and “tweaking” a Web site to reflect a company’s value and style — it also might involve enhancing a seller’s verbal language and style. As in, “don’t say that — say this.”
And the data room, whether virtual or physical, needs to be analyzed internally and externally — by “your legal team and financial team” — because the buyer’s due diligence team will “tear your company apart limb by limb looking for every tiny piece — the more so if you’re asking for high value,” Lancaster said.
And now is not the time to lose one’s patience and exit ungracefully — like yours truly, staging a flying dismount off a mountain bike in Red Rocks Canyon.
“We’re all crawling out from under a deep global recession. Transaction volume dropped like a rock,” he said. “You’re not likely to get the best outcome, compared to waiting two to three years (except for defense contractors). So now is the time to start positioning your business — two years before you’re ready to sell.”
Pitfalls have to be addressed before the buyer finds them, he said. And the lawyers or CPAs “you’ve worked with all these years and have been good for your company all along” might not be the right choice when it’s time to sell.
“It’s like the difference between a brain surgeon and a general practitioner,” Lancaster said.
“Lawyers from the other side will be crawling all over your business,” said Paul F. Lewis, attorney with Sherman & Howard.
Of course, they’ll be looking for potential exposure and how compliant your company is as a going concern.
“No one wants to buy a lawsuit,” Lewis said.
Intellectual property needs to be protected, and there can be entity issues or employment and contract violations. Deal-killers can include things such as having nonexempt employees who have been, say, working 60 hours per week.
“It could be a potential overtime issue of $1 million,” Lewis said. “You want to get attorneys involved early on in the process.”
On the other hand, nondisclosure and confidentiality agreements are “crucial.” Otherwise, “if a deal doesn’t go through, your competitor has all the details of how to run your business — so they can compete against you,” he said.
Sellers need to be aware of non-compete agreements, which need to be “narrowly tailored. If it’s too broad, you cannot start another business.”
Non-compete agreements need to define time, geography and competition, which means that “part of planning your exit is answering the question, ‘What will I do with the rest of my life?’”
And, if the business has a minority owner, sellers must watch out for dissenters rights.
Equity holders are entitled to “fair value” upon a “triggering event,” defined as the sale of substantially all assets or significant stock swaps or sales.
“Being able to demonstrate good faith is paramount,” Lewis said. “If you have minority shareholders, it can cost you dearly if you don’t take steps to make sure you have fair valuation. And it will be very difficult to show good faith if you didn’t bring in guys like Loren and Austin at the beginning.”
Rebecca Tonn covers banking and finance for the Colorado Springs Business Journal.