Business owners who want to sell their company and have the freedom to do whatever they want, whenever they want, without worrying about money face the reality that they are unlikely to get enough cash in today’s merger and acquisition marketplace. Investing cash might not generate a reasonable rate of return, and the current stock market is too unpredictable.
Faced with limited prospects, owners often wonder if, rather than exiting, they can back away from their companies and treat them more as an investment for the short term.
In addition to a scarcity of cash buyers, the merger and acquisition market is no longer supporting the high valuation multiples widely achievable just a few years ago. Instead, most industry sectors have seen a 20 percent to 50 percent decrease in valuation multiples.
Poor investment opportunities and the lack of cash buyers willing to pay fair value for successful companies are sound reasons for owners to choose to stay involved in their companies. The issue for many owners then becomes: How do I back away and let others run the business without transferring ownership and control?
One answer is to engage in exit planning without giving up ownership. After all, someday every owner will need to orchestrate a permanent exit.
Exit Strategies To create an intermediate exit plan:
- establish owner-based ongoing business objectives;
- determine future cash flow needs for the owner and for the business; and
- build a strong business that is capable of operating without the owner.
First, work with exit planning advisors to establish a timetable for backing away from the business. Clearly communicate what backing away means in terms of time commitment, emotional involvement and financial guarantees.
Second, ask advisory team members to determine the amount of income the business needs to provide.
Third, remember the characteristics of a standalone business (one that can run without the owner) may be the same characteristics that attract third-party cash buyers. A company that can be managed from a distance and that can provide adequate cash flow with little risk of nose-diving is highly attractive both to third parties and to the owner who wants to step away.
To create that type of business, establish critical value drivers, including:
- increased cash flow;
- operating systems that improve sustainability of cash flow;
- improved facility appearance;
- debt reduction;
- documented sustainable earnings;
- a growth strategy; and
- a strong management team.
When working with advisors to form a standalone business, pay particular attention to creating repeat, sustainable internal systems, and developing and properly motivating the management team. To run successfully on its own, a company needs systems and management in place that are capable of replicating the owner’s leadership.
The most valuable businesses are said to be those in which the owners are no longer valuable. Planning to step away using intermediate exit planning can create a more vibrant business. When the day of departure eventually arrives, both the owner and the business will be prepared.