Finance Roundtable: Preparing Your Exit Strategy

Like(0)

On February 9, Cresa Atlanta and CPA firm Habif, Arogeti & Wynne (HA&W), LLP hosted a round table discussion of “exit strategies”—how business owners can prepare their businesses for eventual sale.

Three speakers—Stephen Sonenshine, partner, transaction advisory services at BDO; Don Bravaldo, CPA and managing partner at Bravaldo Capital Advisors; and Derek Pitts, director, merger and acquisition services at HA&W—discussed when businesses should start thinking about their exit strategy, how to develop an exit strategy, and how to maximize exit value. Bishop Leatherbury of BDO served as moderator.

Exit Strategy To-Dos

To maximize valuation and to ensure a competitive sale, businesses should begin preparing their exit strategy at least three to five years in advance. One fundamental issue to consider is the company’s structure – for example, LLC, Inc., S Corp, etc. The company should be set up appropriately from the beginning, because changing the structure later can be difficult and time-consuming.Companies can use their financial numbers to tell a story. The story must match their financials, and the CFO should share in developing that story. As part of this process, businesses should invest in a sell-side earnings analysis. This analysis illustrates trends, such as whether customer growth has been good and how the business has changed to match its customer base. R&D investments should also be included. Appropriate revenue recognition policies need to be employed, and recurring revenue should be distinguished from non-recurring. Year-end adjustments should be explained as part of the “story” and the business should detail how it has improved its practices, if applicable. A successful deal depends on prudent information management, and the business’s story should focus on the positive. But everything related to the business’s financials—the good, bad, and ugly—should be disclosed up front, at the appropriate time in the process. Unpleasant surprises can cause deals to die because the potential buyer’s confidence has been damaged by a previously undisclosed issue.
Due diligence on taxes is essential. Businesses must ensure that sales taxes are filed appropriately in the right jurisdictions. Sales and use tax laws have changed substantially over time, so it is important to keep up with regulations, especially when a business expands across states. A failure to file taxes correctly can cause deals to fail.

A company should also ensure that it has competent leadership and management in place in addition to the business owner. A buyer is investing not only in the business itself but also in its management team. Companies can engage industrial psychologists to assess their management team and to identify any weaknesses. Then the business can bring in additional staff if needed.

Be Ready!

Eighty percent or more of lower-middle-market, private or closely-held business owners are unprepared to sell their business, Don Bravaldo asserted. Often unforeseen events—such as health or family issues, discouragement with a business’s performance, or unhappy shareholders—force a business into an exit strategy. Businesses and their owners need to be prepared for exit at any time.

To illustrate his point, Bravaldo described a recent deal with a trucking company whose owner was forced to sell the business when his health began to fail. Though the company had performed well over the years, at the time of the sale, the business owner had only poor-quality internal financial statements, no set processes in place, and no experienced management team supporting him. His business model used older equipment maintained by his repair shop, resulting in a poor safety record and higher-than-average fleet fuel costs. His company was purchased at a below-market price compared to other, similar-sized transportation companies. If he had cleaned up his financials and stabilized his business ahead of time, he could have obtained several million dollars more for his business, Bravaldo estimates.

Bravaldo cited another business, a specialty chemical company, that did manage to clean up its act in time, resulting in a highly favorable sale in a competitive market. The company was a star performer in manufacturing and operations but was generally unprepared for the financial, legal, and administrative investigation and documentation required to maximize valuation and complete a transaction. When the company decided to seek out a buyer, only one showed interest. The business spent six months and hundreds of thousands of dollars on professional services in an attempt to meet the acquirer’s informational demands and to get its financial, legal and administrative house in order while also negotiating with the lone buyer. Ultimately, the deal collapsed after the buyer made several downward adjustments to the purchase price—partially because the seller was unprepared, and the buyer was seeking to minimize risk and exposure.

The company then hired Bravaldo’s firm to advise and orchestrate a confidential competitive auction process that lasted another six months. Bravaldo Capital Advisors (BCA) helped the company prepare the proper documentation, devised a competitive marketing strategy, and identified potential acquirers. BCA then worked to market the company in a controlled process, resulting in the identification and contact of 60 highly qualified acquisition prospects, 30-40 of whom looked closely at the company for acquisition and reviewed the materials BCA had assembled. Five buyers ended up making offers, and when the final sale was made, the valuation was double that of the original, failed deal.

According to Bravaldo, preparing a company to be sold is no small effort. But it can mean the difference between a below-market, hasty sale to a single prospect and a competitive sale for the maximum valuation of a company. That difference can mean millions of dollars to a business owner who has spent years—even a lifetime—building his or her company from the ground up.

Current Market Valuations

Market valuations for large cap, publicly traded companies have declined in the last few months, the speakers warned, and large cap LBO transaction valuations have been shaken as leveraged debt markets have struggled. The volume of merger-and-acquisition (M&A) transactions with valuations greater than $500 million has recently decreased, but transaction volumes and valuations for lower middle-market companies—defined as enterprises with $10-$300 million in revenue—are still relatively healthy. While valuations have leveled out, they are still near all-time highs, especially in the technology field. Debt is still readily available, and equity capital is particularly focused on SaaS and cloud technology companies. So, for smaller firms that are prepared and ready to exit, now maybe the time.

Organization Type: Business Enterprise
Article Type: Expert Article
Industry: Financial Technology
Focus: Funding/Investment
Location: Greater Atlanta

Comments are closed