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Building Business Value Now for Successful Exit Later

Long-Term Strategy Including Making Companies Attractive to Buyers

By Phillip L. Currie


Managing a growing and thriving business can require 60-hour weeks. The day-to-day events can consume even the best-organized CEOs. As a result, the establishment of an exit strategy is often postponed. Business owners inherently believe there is plenty of time later to firm up an exit strategy. The problem with this thinking is that without a strategy, improper decisions can be made that greatly reduce value or eliminate exit strategy options.


Today, many companies are built to sell. Owners with this strategy continually focus on factors to enhance the exit process. The best advice is to ensure you have a balance between the "here and now," and the "there and later." Ask yourself, what is my dream for this business, and if I reach that dream, what then? How will my family and I eventually benefit from these years of hard work and risk?


Your options include leaving the business to family members, going public, or selling it to employees, a private equity group or strategic corporate acquirer. A natural tendency in a young business is to have a very short time horizon - next payroll, next tax payment, next customer, next month. But to realize a successful (and earlier) exit, the business owner needs to keep his or her eye on the ultimate disposition of the company.


If the ultimate goal is an initial public offering, you have to do different things than if the goal is to sell a private company. For example, a C corporation, which allows unlimited shareholders, is the appropriate form if you plan to go public, however the sale of a C corporation can be more expensive from a tax standpoint compared to selling a sub-S or limited liability corporation. With an end game in mind, your advisors will be much more effective in insuring you have the proper business structure.


Make Decisions Based On 'There and Later'

When making day-to-day decisions, owners need to focus on the long-term ramifications. Don't be driven by today's needs and priorities without determining potential effects on your future and your ultimate exit.


Recently, an entrepreneur obtained less than $1 million in corporate funding to help develop a specific technology. Soon that technology was up and running - and in demand. When the next round of funding from a strategic corporate investor was pursued, the terms of the first round "clouded" the ownership of the technology for subsequent investors. This caused a valuation impediment of nearly $10 million. When a business reaches that point, the remedies become prohibitively expensive.


Had the entrepreneur and his advisers insisted on different terms up front for the first round of funding, looking at "there and later," this impediment could have been avoided.


Invest Time in Planning the Exit

Spend 20 minutes a day thinking about the exit. This time will produce more monetary value in the end and make earnings from anything else you would do with this time pale in comparison. Wealth does not generally come from the earnings of the business, but upon the exit from the business.


What should you think about? Look from the outside in. Determine who should eventually own your company and why. Take a buyer's view of what will make the business more attractive from a strategic standpoint.


  • Perhaps you should devote more resources to developing proprietary and unique products or methods.

  • Can you develop a brand? Branded companies are often sold as a multiple of sales, rather than a multiple of earnings.

  • Document and protect your technology.

  • Corner a particular market or niche and become a price leader.

  • Become recognized. Do you have a good media and public relations strategy?

  • Are your contracts and agreements written so they would provide value to a purchaser of your company? Often, language in contracts can be problematic for buyers and investors.


Understanding Due Diligence Deal-Breakers

The due-diligence phase of a transaction is when all details of the business are inspected. In our experience, business owners often unwittingly make decisions today that are deal-breakers tomorrow. They make decisions for expedience, again based on here and now rather than there and later.


High on the list of due-diligence deal-breakers is any inordinate dependency on factors outside the owner's control. These include too much revenue from one customer, too much risk from a sole supplier or too much dependence on technology controlled by outsiders. Why would a buyer want your company if it is dependent on outside technology? The buyer would likely discount your value or worse yet, acquire the technology from the outsider, just as you have.


The bottom line to maximizing value - and assuring a successful exit - is to own your own magic. At least have exclusivity on that magic.


Another area of concern during due diligence is long-term agreements. You may enter into seemingly insignificant agreements that become deal-breakers. Examples that allow outsiders to "hold up" your transaction include lease, employment, licensing, loan and stockholder agreements. Obviously, no one is recommending against entering into such agreements; just that you enter into them under terms that do not preclude a successful sale.


It may seem obvious to counsel business owners to avoid mistakes, but there are some that are perilously easy to make and unbearably tempting. The top among these is the temptation to dabble with a potential buyer. Don't dabble. Your company is either for sale or it is not.


The singing siren is an unsolicited buyer who allows you to "see what this baby is worth." The risk is that the exploration will employees who will get nervous and bolt, to customers who will look to competitors, to competitors who will look to take both customers and employees. Testing your value can severely reduce your value.


On the upside, when the time comes to exit - to tum your value into wealth - there are some must-dos to keep in mind. Insist on competition among suitors. True market value can only be determined by getting negotiated offers from different buyers with different motivations to own your company. The absence of competition means selling at a minimum 35 percent discount below market value. Understand valuation as it applies to your business. Benchmarking may seem objective, but it tends to undervalue good companies.


Finally, do not make the mistake of overestimating your own ability to do the deal yourself. If you do, it means taking your eye off the ball of running the company, faking sincerity with competing suitors and still having trust with one at the end, and negotiating with someone who likely has superior skills and deal experience.


Build the value, keep your exit in mind, avoid devaluing mistakes and at the end your strategy will be a lucrative one.


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