Building an Exit Strategy

Whether you’re an entrepreneur or the owner of a multi-generation business, a well-planned exit strategy is imperative. It’s not just a contingency plan: Knowing your end game informs critical decisions all along the way to ensure you achieve your personal and financial goals. What follows are some considerations for forming an exit strategy and an overview of the steps to execute it.

Adopting an Investor Mindset

For many owners, the business is their most valuable asset and may well comprise most of their net worth. The business is not just a means to earn a living or to support a lifestyle. It’s an investment, and successful investors seek appropriate risk-adjusted returns.  

Adopting an investor mindset means considering the positive impact of any given decision on the long-term value of the company, whether by mitigating risk or increasing return. Strategic plans help you navigate shorter-term alternatives to produce desired results, while an exit plan focuses on the arc of those longer-term goals.

Key drivers of long-term value include:

• Recurring revenue and earnings growth
• Depth of management
• Diverse customer base
• Strong supplier and vendor relationships
• Quality of earnings and financial reporting

Defining Success for You

Exit planning starts with defining what a successful outcome looks like for you as an owner. Carefully reflect on your individual goals, objectives, and top priorities. An exit event is the culmination of years or even generations of effort, and there are strategic, financial, cultural, and legacy factors to take into account.

Factors that may inform your exit plan include:

• What is your desired exit timeline?
• What are your financial needs after exit?
• Are you willing to remain involved in the business after the transaction?
• Do you prefer a single liquidity event or retaining some equity for a “second bite” in the future?
• Are there key employees (possibly family members) who are part of a succession plan?
• How important is continuity of culture and legacy?

Identifying Your Ideal Buyer (or Partner)

There are several types of investors in the market, each with different objectives and deal structures, including:

• Private Equity Funds (or Sponsors) – Institutional investors seeking a platform investment or an add-on acquisition for an existing platform during a fund life (typically less than 10 years)
• Strategic Buyers – Public or private companies seeking to expand market share, geography, or product or service offering
• Family Offices – Private companies that manage assets for high-net-worth families seeking direct investments typically for long-term value creation
• Independent Sponsors – Institutional investors similar to private equity but without a fund structure

Crafting Your Story

Once you’ve signed an engagement letter with an M&A advisor (or investment banker), the first order of business is to gather and analyze information to prepare your confidential information memorandum (CIM), the deal book to be shared with prospective buyers.

It’s a detailed description of your business, including the history, current leadership, recent financial performance, business mix, and operations and organizational overviews. The purpose of the CIM is to provide enough relevant information to the prospective buyers so that they can submit informed, non-binding Indications of Interest (IOIs), which is the first round of the bidding process.

Telling Your Story

When you are ready to go to market, your M&A advisor sends the prospective buyers an anonymized teaser with key selling points to gauge interest in the opportunity, along with a non-disclosure agreement (NDA). The NDA should include restrictions on the use of confidential information and provisions regarding non-contact and non-solicitation. Interested parties that execute NDAs are granted access to a secure data room where they can review the CIM and other marketing materials and ask questions during a designated Q&A period. Prospective buyers who wish to move forward in the process submit IOIs containing the information requested in the bidding procedures and within the specified timeframe.

Narrowing the Field

After evaluating the bids, your M&A advisor will help you decide which bidders to invite to the next round, which includes management meetings and presentations, site visits and additional Q&A. This phase of the process is critical for assessing strategic and cultural alignment between the prospective buyers and the seller.

Prospective buyers who wish to continue further in the process then submit letters of intent (LOIs) containing additional specificity regarding the terms of a proposed transaction as required in the bidding procedures. Details should include an exact purchase price, deal structure, financing sources, due diligence requirements, and the exclusivity period. Most LOI provisions also are non-binding, subject to satisfactory due diligence. However, once the seller selects a buyer and executes an LOI, the exclusivity provision likely will have binding effect while the buyer conducts due diligence.

Closing the Deal

During due diligence, the buyer exhaustively reviews financial records, legal documents, and organizational and operational details, examining all aspects of the business for perceived and latent risk. Often the buyer engages third-party diligence firms to help in this phase of the process. The buyer working group can exceed 50 or more advisors, depending on the size and complexity of the transaction. The time and expense associated with buyer due diligence is a clear reason for a binding exclusivity period (typically 60-90 days).

Attorneys for both sides of the transactions begin drafting and negotiating the definitive purchase agreement and preparing the related schedules and required transaction documents. One critical negotiation item often near the end of the process involves net working capital, which can result in a purchase price adjustment. Your M&A advisor, along with your legal counsel, should shepherd you through any late-stage negotiations, all the way to the closing of the transaction.

The whole process can take six to nine months, and some last for more than a year. For many business owners, this is a once-in-a-lifetime decision, but the outcome can be life transformational. Choosing an experienced M&A advisor who understands what is most important to you will help you achieve the successful exit that you’ve planned for and deserve.

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