What Business Owners Should Consider When Planning an Exit

At some point in a business owner’s life, an “exit” will occur. This exit means that the business will be transitioned to another party. This party could include, but is not limited to, strategic acquirers, private equity, family office investment, and even family members (next generation). When this time comes, it is very important that the business owner has a strong understanding of the underlying value of the business, as well as the nuances of any potential suitors.

You might ask why there are so many different types of suitors? Because different types of suitors will have unique strategies for the business. Here is a quick breakdown of each suitor type, as well as their potential agendas:

1. Strategic Acquirers: Here, there is usually an underlying strategic reason for the deal. Cost synergies could exist, geographic expansion could be in play, and the elimination of a competitor could be a driving factor.
2. Private Equity: This is typically part of a larger “rollup” strategy. Private equity acquires a platform company and then bolts on synergistic opportunities to form a much larger company over time, one that ultimately gets “flipped” or sold to a larger entity.
3. Family Office: Often these are long-term holders looking for diversified returns, and leadership is typically left to run the business as it continues to drive solid returns for the investor.
4. Family Members: Succession is the name of the game in this transaction, with families wanting to continue the business by transacting between themselves.

The value of the business at exit should be modeled and include various scenarios and sensitivities that allow the business owner to make the best decision possible. This is typically the largest asset of the business owner, so it is absolutely critical to select the right scenario for the business. Our models have the potential to help the owner understand the value differences each suitor would bring, as well as any underlying risks. 

The exit of the business is typically a very emotional event for the owner. Given this, it is very important to have the right advisor and information so that these crucial decisions are not driven by emotion.

Company for sale: A real-world scenario

Here’s an example that illustrates how CLA can help in an exit situation:

A business owner recently made the decision that, given the continued M&A market and multiples being paid, it was time to test the market and put the company up for sale. The owner did not want to transition the business to family and made the decision that it needed to be an external party. In discussions with CLA advisors, the owner realized that he first had to understand who the buyer really needed to be. Second, the business owner came to realize that he did not have sound financial information in order to “go to market.” 

CLA was able to help the owner prepare a Quality of Earnings report to help him see some of the areas that a buyer was going to focus on. During the process, CLA advisors also performed a valuation and ran scenarios for the owner to show him how each buyer might look at adjustments and other types of financial information. This was key for the owner to know so that he could make the right decision on what type of buyer and what value he was willing to accept. 

After valuation model consulting and financial due diligence, the seller decided to go to market and find a buyer that was willing to leave the company “in place” and not make big operational and personnel decisions. This decision meant the owner would not get the highest value in the modeling and would likely be looking for a long-term investor group/family office. The owner was still able to work for several years and was also able to negotiate a consulting agreement to continue to “run” the business after selling the equity to the investor group/family office. 

How we can help

CLA uses a thoughtful, objective, industry-focused approach to help you discover opportunities. We take the time to understand your company’s operations, history, and earnings performance so we can provide a realistic valuation and financial information that can facilitate sound management decisions. Through the valuation process, you can explore a variety of ways to help build the value of your operation. From taxes to succession planning, the depth of our experience and the breadth of our services can provide all the resources you need in one place.