SEMA News—February 2013
By Mike Imlay
Exit Stage Right
Why Every Business Owner Needs a Plan
Will you retire gracefully? Pass your company on to family? Opt for a management buyout? Go for a merger or acquisition? Or will unforeseen circumstances force your exit sooner than expected?
Having an exit plan to cover every contingency is like insurance for you and your company’s future. Unfortunately, as the U.S. Small Business Administration (SBA) noted in its website article “Getting Out,” many small-business owners lack an exit strategy addressing such events as financial hardship, disability, retirement or even death.
“Given the current economy, it isn’t surprising small-business owners focus their energies on business survival, future growth and even remaining active in business after retirement,” conceded the SBA.
However, according to Rick Schwartz, managing partner of Schwartz Advisors LLC in La Jolla, California, a solid exit plan is actually a key ingredient in promoting business survival, operational efficiency, growth and profits in the here and now.
“Just like you want to be thinking about your sales, marketing and product line, it’s very useful for business owners to at least give some thought every year to what they want to do with their business in the next three, five or 10 years,” said Schwartz, who recently led a 2012 SEMA Show educational seminar on the topic. “Sometimes you know what you want to do, which makes it easier to plan a course of action, and sometimes you’re not sure. But that shouldn’t stop you from at least being proactive about setting your business up for success.”
In other words, a good exit strategy gives a business owner long-term goals to work toward. It helps you evaluate your business and its true worth the way a potential buyer might—and sets you on a course to increase its value through everything from hiring talented, success-oriented people to improving day-to-day operations.
“Sometimes as business owners, it’s easy to do things just because they’ve always worked that way,” continued Schwartz. “But it’s important to step back once a year and look at your business and ask how it can be more efficient, more effective.”
As a business owner, you never want to be in a situation where you have to do something like sell the company because maybe you were in an accident and can’t work.
“In some cases, the client has no idea when any merger or acquisition activity will take place,” Schwartz pointed out. “What we’re doing is helping them think about things down the road that they might want to pursue. It’s not necessarily something that’s imminent—it’s preparing for the future. As a business owner, you never want to be in a situation where you have to do something like sell the company because maybe you were in an accident and can’t work. Or what happens if someone calls you one day out of the blue and says they want to buy your business and you’re not prepared for that?”
Perhaps as a business owner you’d rather pass your life’s work on to family or others without selling it outright. Even so, you’ll want to see it as a commodity and take appropriate steps to increase its valuation in the same manner as if you were actually putting it on the market.
“I think it’s important to be asking what buyers look for in a business,” emphasized Schwartz. “If you have a product, you know what the customers want. You know what their habits are, what they’ll buy and the price they’ll pay. You have to think of your business as a product.”
Mike Dunkle, a partner in Business Team Los Angeles, agreed. His Torrance, California-based company specializes in the sale of small businesses with gross sales ranging from $500,000 to $10,000,000.
“It makes for good business planning for an owner to be looking at how he runs his business, even if a [planned exit] is five years out,” Dunkle said. “And although he may be comfortable with the way he is, it’s good to start putting on glasses that look at his business as if he were a prospective buyer.”
Where to Begin
With many basic examples available on the Internet or through business consultants, strategic plans are “living documents” that are subject to evolution. The important thing to remember is that a company that identifies its goals and tactics in writing instantly raises its worth. More than that, a roadmap to growth is something every business should have, regardless of any future merger or acquisition considerations.
“A good strategic plan starts with articulating very concrete goals and following up with clearly thought-out tactics for achieving those goals,” said Schwartz. “Sometimes business owners are really good about saying what they intend to accomplish in the next 12 months, three years, five years. But if you don’t know what you’re ultimately aiming for, you’ll never get there.”
Both Schwartz and Dunkle emphasized diversifying the customer base and sales channels as part of that plan, since potential buyers shy away from businesses that put all their eggs in one basket. The good thing is that most companies actually see an increase in cash flow, profits and market share as they implement their plans.
Meanwhile, executing your plan will go much easier if your staff has contributed to its development along the way. And that leads to another critical element of an effective exit strategy: a separate succession and/or transition plan.
In short, your company’s value also increases through a plan to ensure continuity of business. Equally valuable are talented, well-trained employees who are ready to implement that plan. For some business owners, stepping back from responsibilities may be difficult, but a well-organized transition plan will be worth its weight in gold should something unfortunate suddenly happen to you.
“We stress efforts to have as solid a supervisory and management structure as possible,” explained Dunkle. “It’s absolutely critical to the new buyer coming in and to the owner who’s selling because he’s concerned about his employees, wants to make sure his customers are taken care of and wants to make sure the new owner can continue on.”
Doing the Paperwork
Ultimately, however, Dunkle said that the most important step in your exit strategy will be getting your company’s paperwork in order well ahead of time.
For some business owners, stepping back from responsibilities may be difficult, but a well-organized transition plan will be worth its weight in gold should something unfortunate suddenly happen to you.
This past year, San Francisco-based warehouse-distributor Pacific Automotive Co. implemented its exit strategy by selling to the Genuine Autoparts Co. Bruce Dorr, Pacific’s former president and COO, said that paperwork was the most vital part of his company’s preparation for sale.
“I was shocked at the amount of documentation that was requested,” he said. “I think the people that bought the business probably ended up knowing more about it than we actually did. It’s a matter of getting all the leases together, all the employee manuals, all the P&L statements and tax returns, all the medical insurance [paperwork]—everything that a company would require. We had to make copies of it all so a buyer could do their due diligence. By being prepared with this information, we were ready when the time came to sit down and discuss various options and which buyer would be the best fit for our company and our employees.”
Dorr further explained that having a comprehensive exit plan was worth the effort when it came time to sell the business.
“The planning helped us stop and think whether we really wanted to sell the company,” he explained. “It made us become realistic about what our expectations were. It can be very stressful. You’re taking something that you’ve worked very long and hard on and taken a great deal of pride in and turning it over to someone else’s business decisions.”
In the end, however, Pacific’s planning paid off, fetching top dollar for the company and ensuring that its employees were retained with full benefits.
“Oftentimes when people want to sell their business, they have their own ideas about what they think it’s worth, rather than what the real world says it’s worth,” Dorr said. “Being realistic eliminated a lot of problems. Ultimately, it’s only worth what someone is willing to pay for it—not what you think it’s worth.”
Increasing Value to Buyers
According to Rick Schwartz, managing partner of Schwartz Advisors LLC, the following checklist can make a company significantly more attractive to potential buyers.
- Stabilized sales through a diversified mix of core customers and multiple sales channels.
- An identified competitive advantage (i.e., better quality, innovation, reliability, on-time shipping, competitive pricing or solid customer relationships).
- Clearly documented sales, potential new business and growth projections six months to a year out.
- A clean set of financial statements and other documentation, including tax returns, articles of incorporation, corporate resolutions, leases and contracts, and loan documents and asset schedules.
- A written strategic plan—including a succession plan—and a trained, talented staff to implement it.
- The absence of such red flags as past-due taxes, outstanding legal or employee issues or unpaid rent and bills.