How Does a Business Best Prepare for an Exit?
SEPTEMBER 11, 2015 by DR. JON WARNER in ENTREPRENEURSHIP
Sooner or later every business owner (or its shareholders) will wantto “cash-out” or sell some or all ofthe business or
bring aboutwhat is often called a “good exit” in modern parlance.Buthow does a business bestachieve this exit? In
all cases preparation is the key, and,although no two businesses are the same,theyall need to make sure that a
number ofactions are taken well ahead of hanging the “for sale” sign out(or even responding to the unsolicited offer
that a business maybe lucky enough to get).
In general there are five key action steps thatneed to be taken and in this briefarticle we’ll look at each of these .
A. Hire the Right Advisers (and Identify those with the right kind and level of
There are clearly a wide range of specialized advisors thatwill directlybe involved in the sale process (such as in the
banking,legal and accounting profession,for example) that regularlywork on both the buy and sell side ofthings or
mergers and acquisitions.While all of these financial and legal advisers need to be involved earlier than you may
think, a business mayalso wantto think aboutother advisers who can assistin other areas (and in particular on the
next step of operational preparation and clean-up).This mightinclude a managementconsultant,strategyexpert or
even human resources professional,depending on where the business is and whatitneeds.
B. Operationally prepare and clean up
Many businesses either getan unsolicited offer and are nowhere near ready to exit or have done no professional
“clean-up” of importantprocesses so thatit will pass a due diligence test(which mostacquiring businesses would
want to apply). Although this “clean-up” may vary in scope and the time it takes to implementthere are five areas of
primaryfocus as follows:
1. Seek to fill critical holes in themanagement team and make sure that it is as balanced and as professional as possible. This
includes ensuring that key roles like a chief financial officer and chief marketing officer are in place (or at least that a
business founder is genuinely and professionally performing this role). It is also useful to put in place an incentive
compensation systemto retain key management staff and senior employees.
2. Document key processes wherever possible. This doesn’t have to be about producing thick manuals but is about having
important information out of founder and executives heads and on paper as part pf the knowledge management process.
3. Spend time ensuring that both revenue courses and customers are as diversified as possibleto ensure that “too many eggs are
not in thesame basket.” This also applies to suppliers if you have too few of them. Diversify revenue generation and
customer/vendor relationships if necessary.
4. Ensure that all processes are reviewed for best possible costs. Where this is not the case, make cuts or outsource (especially
where this is non-strategic to theparticular business).
5. Ensures that the business has a longer range plan. This may be for 3 or 5 years but should be more than just one year.
C. Pay attention to existing and potential legal issues
Many businesses run into legal issues when theywish to seek equity, raise equityor bring in a new partner
organization.As a result,it is worth paying early attention to any legal issues thatare going to be problematic (such
as having a well-documented and clear partner agreementbetween owners) and future legal issues thatmaycrop up
in the future. Once again,depending upon the particular companythis maybe a long listbut the main questions here
are as follows:
1. Are all equity and other ownership grants properly documented (which will be critical when a business is asked to
corroborate its capitalization table)?
2. Are major contracts up-to-dateand well written/comprehensive (for example do they contain a business sale adverse clause)?
3. Are assets for sale appropriately listed and recorded in the business name?
4. Where IP is owned by individuals is the basis on which it is used clear and fair in the event of a sale?
5. Are there any regulatory or legal filing requirements that need to be completed to ensure compliance?
6. Are copies of significant corporate documents, such as certificate of incorporation and board minutes readily available and
easy to access and share when needed?
7. Are past legal disputes or litigation properly recorded and available to share?
8. Are all employment and external consulting agreements up-to-dateand appropriate?
D. Plan financially (and particularly from a tax perspective)
Although legal traps and issues are critical,there are justas many possible pitfalls to a business which wants to sell
in the financial realm and professional advice here is therefore justas critical as it is with the law. The basic rule here
is that it is not enough justto have month to month bookkeeping or basic accounts to show in a future sales situation.
Above and beyond this, a business should be thinking about:
1. Ensuring that the whole financial reporting systemis comprehensive and robust at all levels (including standard reports, cash-
flow, and variance analysis
2. Preparing a sound governance and controls systemwhich adequately controls all major business processes
3. Organizing the external review or audit of financial statements by a reputable firm to most appropriatestandards (such as
4. Making sure that normal working capital needed by the business on a medium to long term basis is clear and that EBITDA is
calculated and available to show month by month.
On the tax specific side ofthings there are also a number offactors to consider including:
1. Whether or not thebusiness has the right tax structureto do any kind of deal
2. Whether or not an estateplan exists for the business and its owners to ensure that ownership is held by proper legal entities
3. Evaluating whether it is necessary to engage in a tax review for federal and stateincome tax, local tax, payrolland property
tax, sales and use tax, foreign tax, withholding taxes, etc.
4. Comparing what the after-tax cash results are likely to be in a stock sale versus an asset sale for each stock/option holder
5. Think carefully about a number of other issues which may have a tax implication on sale including, determining if any
shareholders are non-residents (or plan to be), whether or not any sale might require a rollover by thefounders or
management, determining any impact on management/staff bonuses or options, considering whether any assets/liabilities will
be distributed to sellers pre-close, thinking about any possibletax credits that can be used to offset income, etc.
E. Get the best valuation that you can
Business valuation often goes undiscussed in a business until an unsolicited offer comes in or at leastone owner
wants to sell and puts whatmay be a quite unscientific price on the business.A better approach is to think about both
Internal and External Factors which will impactthe ultimate valuation.On the internal side ofthings this will include
items such as the short,medium and long-term growth prospectofthe business given its processes,technology,
revenue diversity, stability, price margins,strength ofcash flow, how much is being invested (in capital assets and
working capital) etc. In addition,it will also include a genuine evaluation ofthe relative strength and depth of the
managementteam and how well it is incented to perform well.
On the external side of things,valuation will depend on barriers to entry to the particular business and the number
and strength of existing competitors.It will also include a view of how much potential exists for the productor service
and whether or not there are any helpful synergies with other products or services thatmightbe pursued.
Although valuation is more of an art than a science in manycases,there are nonetheless onlya few approaches to
coming up with a number and its useful for businesses wanting to sell to know what these are. Most commonly
companies are sold on a trading multiple analysis basis where theycan be fairly compared to another public
company.Equally a multiple analysis maybe used if a fair and comparable merger or acquisition in the same general
sector or industrycan be found. Outside this valuation moves more into the speculative ream butwill still heavily
depend on factors such as strength and steadiness ofcash flow,strength of and cost effectiveness of customer
acquisition,strength ofEBITDA and general efficiencyand effectiveness ofbusiness processes.
Put simply,no business exitshould be a surprise and itis therefore critical for the owners and senior management
team to think through all five steps described above.Perhaps mostimportantly,the first step,hire good professional
advisers,is the mostimportantand,if done wisely, will help you greatly with the other four.