Exit Strategy Planning

Once a business has operated for a number of years, it makes more sense to develop and maintain an exit strategy plan than a business plan…

The main goal of any exit strategy plan is to maximize value in the business/asset that’s been built.​

• Business plans get you into business and keep you on track in the early years ​
• Exit plans get the business into the most valuable operating posture ​
• Should the opportunity arise, a company operating under a proper exit plan will garner a much higher value upon sale or major disposition of the business

The following are usually included in any exit strategy plan:​

• Timeline to exit​
• Value drivers​
• Exit mechanism​
• Acceptable deal structures​
• Universe of potential buyers ​
• Modeling the business for exit​
• Actionable initiatives based on timeline​
• Expected valuation ​

The timeline to exit is usually expressed as a range and will determine what options are actionable.​

• Short or no timeline​
  • Actionable options – limited to selling what is in place, with some minor modifications​
• One year to sale​
  • Actionable options – restructuring and/or right-sizing the organization​
    • Develop a modified reporting structure​
• Years to sale​
  • Actionable options – Identify and prioritize initiatives​
    • Value the individual initiatives and their potential impact on the exit strategy

Owners must understand and embrace those aspects of the business most valued by buyers.

The list of value drivers include the following:

• Earnings​
• Growth ​
• Recurring revenue​
• Customer base – breadth and depth​
• Revenues under contract​
• Balance sheet​​

The Value Pyramid seeks to identify exit mechanisms in a hierarchy of probable $ outcomes.​

  

Typical deal structure components include:​

• Cash​
• Stock​
• Seller’s Note​
• Earn-out​
• Employment/consulting agreement

The  Penn Valley database has about 200 potential buyers in the Converged Networking segment that include:​

• Private Equity backed buyers​
• Growth buyers ​
• Financial buyers ​
• Opportunistic buyers 

Managing to the upward sloping earnings line:

• Right-sizing the business ​
  • By line of business ​
  • By geography​
  • Increase revenue/gross margin​
  • Decrease operating costs

​Right-sizing the business ​

• Identify the General and Administrative expense structure that will support current business volumes​
• Staffing levels to be adjusted according to business volumes, taking technical certifications into consideration​
• Can be accomplished through an analysis of historical financials​
• Translates into an optimal earnings model​
• At the end of the day, its about earnings

Establish an acceptable valuation goal

• Goal should be owned by all stakeholders​
• Goal should be realistic and achievable within agreed upon timeline ​
• Goal should assume most conservative exit mechanism​
  • Financial buyer – lowest multiple ​
  • Assume a minimum earnings levels ​
  • Combine to establish baseline valuation on buyout

​Actionable initiatives should be defined by their contribution to gross margin within the specified timeline ​

• Define initiatives around existing strengths of the company​
• Define initiatives based on gross margin and value drivers​
• This exercise usually yields many potential initiatives that would contribute to the valuation goal

Actionable Initiatives

• Reduce costs​
  • Every $ reduction in G&A translates into $4 to $6.5 upon exit​
• Increase sales​
  • Every $ increase in gross margin translates into $4 to $6.5 upon exit (assuming no change in G&A expense)​
• Acquisition options​
  • Should not be ignored​
  • Can be used to bolster earnings in a highly leveraged way​

​Acquisition initiatives ​

• Can be significant contributor to sales/gross margin​
• Consideration to geographic and product/service offerings​
• Consideration to cumulative addition to EBITDA​
• Example: ​
  • $10M in sales​
  • $3.5M in gross margin​
  • $2.9M in G&A​
  • $600K in net income​
  • Potential to contribute up to $3.5M in EBITDA​
  • Potential contribution to valuation up to $18M​
• Timeline and valuation expectations will drive strategy​
• All stakeholders should be bought in​
• Actionable initiatives (prioritized) will drive valuation​
• Value Drivers should play a role in any exit strategy​
• Acquisitions can be a powerful, low risk way to ratchet up earnings and valuation ​
• An opportunistic buyer can trump all