An Effective Exit Planning Strategy, a Case Study
A recent survey of business owners from Axial’s Investment Banking membership found that less than a quarter of their clients are prepared to sell before hiring them. The second leading cause of deals falling through is the lack of formal exit planning. This article explores a case study of a regional trading business that dedicated time to create a solid exit plan and successfully sold on their own terms.
The Owner Group
The firm, founded by Fred in the early '90s, grew to a team of 50 operating in multiple states. As the firm expanded, Fred sold shares to his leadership team, adjusting ownership based on performance and long-term employment. By the time we were engaged as the exit advisor, ownership was split among seven people, with Fred holding Class A shares and the leadership team holding Class B shares in an 80-20 split. The President, Mark, and the CFO, Denise, aspired to succeed Fred as owners, each holding equal shares.
Despite their efforts in growing the company, Mark and Denise did not share a common vision for the future, leading to contentious strategic planning meetings. The other minority owners were nearing retirement and expected to be bought out soon, with their shares valued at approximately $250,000.
Fred’s Vision
Fred aimed for a target valuation of $7.5 million, comparable to similar businesses in his market, while the current valuation was about $2 million with 10-15% annual growth. Fred wanted to give Mark and Denise a chance to prove themselves without compromising his future.
Fred and his wife Michelle planned to enjoy their post-sale lives at their newly built lake house and continue making significant charitable donations. Their annual lifestyle budget was around $200,000, and Fred’s high-risk investment strategy further complicated his financial planning.
The Leadership Team
Mark proposed growth initiatives focused on developing proprietary software for real-time market data and acquiring new trading groups. Denise, alongside her husband Charles, fostered relationships within the team and supported a new land brokerage division, which generated significant returns by the end of year three.
Assessing Readiness
A readiness assessment revealed several concerns for Fred's exit:
Financial Gap: Fred had minimal savings and planned to rely on the sale of the firm. His advisor cautioned against this strategy, but Fred preferred his own methods.
Personal Risk: Fred had signed personal guaranties for the firm, and the business’s reliance on key personnel without insurance was risky.
Management Conflicts: Fred struggled with the leadership team's internal conflicts, making a smooth management buyout unlikely.
The Plan
To address these challenges, we developed a comprehensive exit planning strategy focusing on:
Protecting Fred and Michelle: Insurance coverage was purchased to offset personal guaranties and ensure financial security in case of Fred’s death or disability. A financial gap analysis indicated a need for $6.4 million in valuation to support their lifestyle until age 95.
Protecting the Firm: Insurance policies were established for key personnel, and professional advisors were hired to coach the leadership team on conflict resolution.
Creating Clear Leadership Paths: Specific targets and timelines were set for Mark, Denise, and Charles to prove their capabilities. Regular check-ins and annual reviews ensured accountability and progress.
Designing Multiple Exit Strategies: Several paths were laid out, allowing flexibility in decision-making based on the company’s progress and market conditions.
Implementing the Strategy
Despite initial hopes, it became clear that a buyout from Mark, Denise, and Charles was not feasible due to their conflicting visions. Fred decided to let Mark go, aligning more closely with Denise and Charles. Although they lacked the resources for an outright purchase, they bought Fred’s shares in tranches with financing from a local lender.
Results
Fred received approximately $1.9 million in after-tax dollars from distributions before the transaction and $4.8 million from the sale, reaching a total of $6.7 million in retirement savings. This exit plan allowed Fred to secure his and Michelle’s future while maintaining the firm’s stability and continuity.
Conclusion
Had Fred pursued a third-party sale initially, the company likely would have faced significant disruptions. Instead, a structured exit plan facilitated a smooth transition and protected the interests of all parties involved.
Get Started Today
Don’t be like the 75% of business owners who go to sell their companies without a plan. Start with a readiness assessment today to understand where you need to focus your energy and how far you must go to be ready. We are here to guide you through the journey and help you achieve your vision. Let’s get started now.
Comments