Building Business Value Now for Successful Exit Later
Long-Term Strategy Includes Making Companies Attractive to Buyers
BY PHILLIP L. CURRIE
Special to the Business Journal
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, or to 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 is 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.