Punching Out! Exit Planning 101


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As an owner, you’ve spent perhaps 20–30 years building your business, so it’s important to spend a little time to prepare it for sale. Proper exit planning is essential to get the most for the business, increase the amount of cash at closing, help ensure a smooth transaction, get more in after-tax proceeds, and make sure that the owner’s personal goals are met.

1. Plan

The biggest obstacle to many deals is the owner. If the owner is not prepared or is unsure if they want to sell, it is difficult to get a deal done. Many tech companies are founded with an exit plan in mind from the beginning, but that is not usually the case for manufacturers. If the owner has sold businesses before or acquired the business from the founder, then there is no substantial emotional attachment. If you’re selling your baby, however, it can be rough. Owners who are too emotional create unnecessary delays and can unwillingly establish an environment of mistrust. Having a plan can take away the uncertainty and prepare the owner mentally for retirement and beyond.

2. Assemble the Team

It is critical to have a good team, which consists of a deal attorney, a CPA with M&A experience, a business broker/investment banker, a wealth advisor, and other advisors depending on the nature of the business. In advance of a sale, the attorney can review all material contracts to see if there are any major issues. The CPA can prepare the books, remove any obvious issues, and help the owner identify EBITDA addbacks. While compiled financials are okay for smaller businesses, we recommend getting reviewed or audited financials for three years.

Lately, many sellers are getting a quality of earnings (Q of E) report from their CPA as well. A business broker, M&A advisor, and/or investment banker—depending on the size of the business—can help inform the owner about the process, discuss valuations, and identify any pros and cons of the business. The wealth advisor can help the owner prepare for retirement as well as identify tax strategies to maximize the after-tax proceeds of the sale. Although there is an expense for the above services, that can generally be added back to EBITDA as one-time transaction-related expenses.

3. Environmental

Particularly for PCB shops, but for almost any other manufacturing business, it is best to make sure that there are no environmental issues. Get a Phase 2 done based on the findings of a Phase 1. Be sure that all permits are up to date and check on their transferability. If the permits are based on the standards of the ‘70s, things may change if another owner takes over. You do not want to kick the can down the road on these issues. If there is a problem, it is best to take care of it right away, whether you are planning to sell tomorrow or in five years.

4. Strategic Review

Flip the table and try to look at your business as if you were a strategic (same industry) or financial (private equity, etc.) buyer. What would you do differently? Are there changes that you would expect a buyer to make, but you won’t make them? Do you have 13 cousins in the business that do not work hard, but you promised your aunt that you would take care of them? The owner can decide whether or not to make these changes, but remember that for every $1 of increased EBITDA, the valuation may go up by the purchase multiple.

5. Expense Review

Particularly if an owner is planning to sell, but in any case, it is probably a good idea to review expenses at least once a year. Many businesses review COGS items often, but other expenses—such as telecommunications, IT services, utilities, freight, insurance, etc.—can be up for negotiation from time to time. As a business grows and everyone gets busier, it is easy to forget that the mat cleaning service had automatic 10% price increases after two years, or you might have missed that the bubble wrap charges have been creeping up. A buyer will probably review all expenses once they take over, so why let them get all of the savings?

6. Get Educated

An educated client is definitely the best client in these circumstances. Talk with other owners/peers who have sold a business, read books and watch videos on the process, and talk with your advisors about how deals work. Explore options to selling, such as an ESOP or management buyout or moving to chairperson and hiring/promoting a CEO.

7. Personal Goals

We get a little nervous if a seller does not have some particular post-sale goals in mind. While we would not recommend booking an around-the-world cruise for the day after closing, having some concrete plans for retirement will help the owner through the ups and downs of the sale process.

8. Make the Business Easy to Buy

We do not mean that you should roll over and ask the buyer for a belly rub. You and your advisors can still negotiate hard, but take away any knowable obstacles to buying the business. If we get into due diligence and the buyer finds out that your WIP calculations are off, the etcher is about to die, there are three expired UCCs on equipment that you no longer have, and all of the I-9s are out of date, it is going to cause delays and reductions in value/terms or possibly kill the deal.

Conclusion

A great offer might come through the window tomorrow, or it may take years to find the right buyer at the right price. In either case, it pays to be prepared. It’s not easy to assemble all 100 items of a due diligence request list while opening up a living trust for your grandkids in one day, so it is best to prepare well in advance of a sale. Proper planning can take away many headaches for the seller and buyer as well as increase the value of the company, help obtain better terms, and overall, make it easier to complete a transaction.

Tom Kastner is the president of GP Ventures, an M&A advisory services firm focused on the tech and electronics industries. He is a registered representative of StillPoint Capital, LLC—a Tampa, Florida member of FINRA and SIPC—and securities transactions are conducted through it. StillPoint Capital is not affiliated with GP Ventures.

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