An exit strategy is only effective if it centers around the owner’s goals. From determining how long the owner will stay on during the transition to factoring in how key employees will transition to the buying firm after the exit, owner preferences need to be implemented into a strategy long before marketing the company. Much of the planning involves identifying which buyer is right for your company. If you could pick a buyer for your business today, whom would it be and why? Building an ideal buyer profile is a vital component of the exit process. There are many types of buyers, but we see these four key players in the market today:
- Strategic Buyer: A firm in your industry already
- Financial Buyer: Private Equity, Independent Sponsors
- Search Fund Buyer: A form of Private equity, very limited in scope
- Management Team Buyer: Internal team members
Exit Planning and Explanation
Each buyer has their strengths and weaknesses, but they are very different to deal with in terms of types of exits, negotiations, and due diligence requirements. Matching the correct buyer type to the opportunity allows the owner to understand how exit goals ultimately will be accomplished. For example, Strategic Buyers may offer stock or equity in the surviving entity as part of the sales price, providing potential upside but limiting the cash received upon close. Financial Buyers may offer more money but demand a seller note or earn-out for a significant portion of the purchase price. Seed Capital, or Search Fund Buyers, are compelling to retiring owners who want to leave the business, its name, and the management team intact, but can be tedious during the due diligence process and delay closing due to the necessity to find outside financing. Management Team Buyouts are attractive instruments but add a layer of risk that both sides must actively mitigate before closing.
Examining the types of exit instruments used, the following are typical in a sale: cash, stock, earn-outs, and buyer notes. Most deals will combine at least two and as many as three types of remuneration for the seller. Cash is king, and upfront is best. Naturally, the strongest, more profitable, and highest-growing firms get more cash at closing. However, in unique circumstances (health issues or accelerated retirement), cash can be available instead of a note or earn-out. Stock can be a great way to get a second bite at the apple as the acquiring company looks to exit downstream. The type of stock received is essential, as some types are more liquid than others. Earn-outs and seller notes come in all shapes and sizes, but when matched with an owner’s goals, they may lead to a very acceptable asset.
One key question regarding the exit is whether the owner wants to stay on for some time or hand over the keys directly at the close. Depending on that answer, the buyer profile may change to suit the owner’s exit goals. Of course, tax implications and strategies are significant issues with every exit, and from time to time, when real estate is involved, that needs to be factored into the equation as well.
Identifying the right buyer through an exit strategy plan will lead to a far better exit experience and an overall higher price point every time — whether an owner wants to retire, be a part of a larger organization, consolidate due to financial hardship, or get out of the business.