Contrary to what most acquisition
advisors say, owners who are selling middle market companies values
from $2 - $250 million do not have to settle for less than premium-priced,
all-cash deals. Even though acquirers are trying to steal your company,
a selling owner does not have to accept a deal laden with contingencies
or finance a portion of the purchase price. I have never acceded to
such terms, as my Firm has advised owners and completed acquisitions
throughout the country for more than 25 years. A process called exit
strategy planning, which my Firm introduced to the middle market in
1990, is a significant factor in enabling an owner to realize a premium-priced,
all-cash deal. To sell your company without exit strategy planning risks
realizing a premium price.
What is Exit Strategy Planning?
Exit strategy planning defines the personal and financial objectives
of a selling owner, and determines the exit strategy and time frame
that will best satisfy those objectives. There are various exit strategies
that owners of a closely-held, middle market company can pursue:
||They can sell their company to
||They can sell their company to
the employees through an ESOP.
||They can transfer their business
to younger family members.
"die in the saddle with their boots on" and allow their
estate to handle an exit strategy.
bring in a seasoned general manager to run their company, and
allow their estate to handle an exit strategy after their demise.
The examples that follow assume that the first stage of exit strategy
planning determined the sale of the company to be the most appropriate
alternative. At that point, it is important to remember that acquisition
prices are not a function of either historical earnings or book value.
Instead, the price is determined by the expected future earnings/EBITDA
and the risk in achieving those earnings/EBITDA given the company's
business foundation at the time of sale. The goal of exit strategy planning
is the planning and timing of the sale such that a premium price can
be generated. The process focuses on how to strengthen the company's
business foundation. This helps position the company as growth-oriented
with expectations of strong future earnings/EBITDA from a solid business
foundation that minimizes the risk of achieving those earnings/EBITDA.
These factors all contribute to an increased acquisition price.
Strengthen the Business Foundation
What aspects of the business foundation determine how the market will
perceive your company? There are many considerations, but the following
primary factors will certainly be evaluated:
4. Financial condition
Marketing - What is the Company's niche? How strong is it? How
defensible are its markets against the intrusion of potential competitors?
A company's niche is often what an acquirer wants. What is the breadth
and depth of the customer base? What are the demographics of the Company's
markets? How will its markets be affected by projected regional, national,
international or industry - specific economic conditions and considerations?
Has the company been successful in penetrating foreign markets? Can
the acquirer achieve greater success in foreign markets? What changes
are expected in its competitive environment? For distribution companies,
what is the quality and capability of the manufacturers' products? What
are the strengths of the manufacturers' distributor programs? Does the
company have the exclusive right for a given geographic area?
Personnel - What is the quality and depth of management? To what
extent does the company depend on the selling owner for managerial skills,
contacts and leadership? How skilled is the work force? How competitive
are the labor rates and the fringe benefit package?
Facilities - Does the company have state-of-the-art technology
in its manufacturing, warehousing and/or extraction operations? Does
its production process produce a cost-competitive, quality product?
What is the current capacity potential? Are its facilities and resources
capable of handling future expansion? What effects do these factors
have on current and future costs, and investment levels?
Financial Condition - The Company's financial statements should
be placed in as clean a condition as possible. This means the company
should have a solid group of physical assets (receivables, inventory
and fixed assets) to give an acquirer. A positive trend in sales, margin,
margin percentage and profit should be shown, if possible. Many things
can be done to place a positive skew on financial information. These
can be determined by a sophisticated merger and acquisition firm. The
following case studies demonstrate how exit strategy planning significantly
increases a selling owner's price.
Case Study #1 - $10 Million Becomes $25 Million
My Firm was retained in 1997 by a food products machinery manufacturer
located in the Southeast. A market value of $10 million was placed on
the company at that time. By implementing the following critical changes
(and a number of others not described), the company's value increased
to $25 million by 2001, when it was sold by my Firm.
At the time of exit strategy planning, the company had an outstanding
group of products that had been developed by its R&D department.
Certain of these products were the top-quality ones in their field;
others were of extremely competitive quality. All generated outstanding
margins, however they had only realized limited sales penetration. Total
sales were $13 million and foreign sales were less than $700 M. By the
time the company was sold, sales had increased to $27 million with $6
million coming from foreign customers. Among the changes that my Firm
recommended, certain were key in creating a significant improvement
in operating results and dramatically increasing the sale price by 250%
to $25 million.
The marketing effort had been run by a "salesman type". The
company needed a sophisticated vice president-marketing, who had the
capability and experience to develop and coordinate an inter-national
marketing and distribution program. The first step was to hire such
a person. Additionally, the in-house sales force was not capable of
effectively marketing the products, either nationally or internationally.
Consequently, it was recommended that mfrs. reps. be used to supplement
the direct sales effort. They were instrumental in obtaining the foreign
exposure that facilitated the increase in foreign sales. The success
of the marketing effort was further aided by the recommendation to institute
a specialized sales effort using "product specialist" salesmen.
These marketing changes not only substantially increased sales; but
expanded and diversified the customer base that negated one of the company's
previous weaknesses, a concentrated customer base. All of these actions
originated from the exit strategy planning process.
At the time of exit strategy planning, the company had a lack of management
depth in areas other than marketing. The management team in the engineering,
production and purchasing areas needed strengthened. Suggestions were
made where to increase the staff. These changes were made during the
ensuing four year period. The eventual acquirer was extremely impressed
with the management team in place at the time of the sale. They indicated
that it was a contributing factor in their paying a premium price.
The facilities presented another weakness. To handle projected growth
prior to the acquisition and near-term growth expected after the sale,
a 70 M square foot plant expansion was recommended. This was completed
in 1998 and increased the Company’s annual sales capacity to $45
million. It enabled the acquirer to consummate the sale without the
need for additional investment in facilities expansion during the intermediate-term.
Plumbing Distributor - $18 Million Becomes $36 Million
A second example of the importance of exit strategy planning is a Midwestern
distributor of plumbing supplies that retained my Firm in 1999. At that
time, the company's value was $18 million. By the time my Firm sold
the company in 2002, its value had increased to $36 million - a 200%
increase. The exit strategy planning resulted in certain recommendations
that were instrumental in the increase in value.
The company had annual sales of $25 million. Its products were marketed
in a limited geographic area to a somewhat concentrated customer base.
It solely served the residential plumbing market. The company had a
solid but aged sales force and a limited management base that was too
dependent on the selling owner. It was recommended that the marketing
effort be geographically expanded, and a strong effort be made to penetrate
the kitchen and bath products market. This market would provide tremendous
synergy with the residential plumbing business.
These recommendations were implemented and the customer base was greatly
expanded. The kitchen and bath business grew to 20% of total sales.
The sales force was expanded by hiring several young, well-connected
industry personnel. This facilitated the expanding into new geographic
markets. By the time the company was sold in 2002 for $36 million, sales
had increased by 70% to $43 million. A strong, non-family second-in-command
and a sophisticated, experienced CFO were hired.
The acquirer was very impressed with the strong growth of the kitchen
and bath business and its considerable synergy with the plumbing business.
The acquirer recognized the tremendous growth potential associated with
the company's strong sales force. After the acquisition, the second-in-command
was promoted to general manager. This facilitated the owner's quick
departure after the sale without jeopardizing a premium price. In this
case, easy-to-institute yet significant changes were made that caused
the company's value to double in a four year period.
Such results are possible for any selling owner. If any owner is planning
to sell their firm within the next 3-7 years, they do themselves a tremendous
service by hiring an outside firm to do sophisticated, executive exit
strategy planning. Many firms serving the middle market have expanded
their academic, textbook valuations to include a less sophisticated
form of exit strategy planning. It is my suggestion that an owner desiring
to pursue exit strategy planning should be certain that the process
will be conducted by a merger and acquisition firm that reviews all
foundational aspects of the business. A solid business foundation places
the power of negotiating leverage in the seller's hands.
Exit strategy planning is much more than a financial analysis. It is
a significant tool that increases an owner's chance of realizing a premium-priced,
all-cash deal. My Firm has found this tool most helpful in consummating
acquisitions for selling owners. It can enable sellers to obtain the
maximum funds for the many years that they have dedicated to their business.
It should also result in their being completely securitized by a strong
Definitive Purchase Agreement with the majority of risk related to potential
post-closing liabilities being assumed by the acquirer. Exit strategy
planning will help most owners of closely-held, middle market companies
increase their transaction price. The process is so thorough in its
scope that it forces an owner to think about the broad economic and
business considerations that will impact their company’s future
profitability. In and of itself, this tends to enable the company to
enact operational changes that will improve its efficiency and increase
its profitability, before the company is sold.