In our current era of market volatility and shifting investor expectations, it is crucial for private companies to have an enduring, well-crafted exit strategy. The absence of a thoughtful exit plan can leave companies scrambling in moments of opportunity and necessity.
Private company owners eventually must exit their businesses. Â Sole founders might sell their company or pass it on to their heirs. Privately owned companies with multiple shareholders must find mechanisms to provide eventual liquidity for their shareholders, which can result from the sale of the company, a merger, going public or another form of transition. Yet, a staggering number of private companies have no structured exit plan in place. This omission not only jeopardizes financial returns to investors but can also undermine the legacy of what may be decades of hard work.
Exit Planning is Critical
As board members of private companies, it is incumbent upon us to press our private enterprises in planning the exit options for the company. This is where our role differs so greatly from that of our fellow board members of public companies. The lack of planning for an exit at a private company can result in a less than optimal price for the enterprise and sometimes, in such dire outcomes as the liquidation of the company, with no value derived other than from the assets, inventory and receivables, after paying down all outstanding debts and accrued liabilities.
If you and your board have not yet started your exit planning process, the time is now. Every private company should have an exit plan in the files, one that is being actively worked, to meet the exit goals of the shareholders and other constituents of the company.
Independent board members are essential in this planning task. I know from decades of experience as an investment banker and, in more recent experiences, as a private company board member that planning for the exit is the one area where owners and operators often don’t have the energy nor the bandwidth to spend time – they need someone to be accountable to or to even delegate the workload from them.
Objectives
An exit plan is the roadmap to an exit for investors and owners, a plan that considers the entirety of the business, all of the company’s stakeholders and the company’s future. Effective exit planning should do the following:
Maximize value. By identifying and enhancing the key drivers of company value, you ensure that, when the time comes, you attain the best price for your business and the best value prospects for your buyers.
Preserve legacy. For many, a company isn’t just about assets and profits; it’s about culture, employees and community. Proper exit planning can help ensure the continuation of the private company’s essence.
Provide clarity. Exit planning sets the guideposts to prepare your company for exit. Those guideposts define the strengths and attributes your company currently has and will establish. They make the company more salable and more valuable.
Minimize risks. Exit planning alleviates questions regarding succession, reduces the potential for disputes, enhances shareholder liquidity and gives stakeholders a clearer vision of the future.
Address tax considerations. Early planning provides opportunities to leverage tax strategies that may significantly impact net proceeds from a sale.
Key Steps
The following strategies are essential to an effective exit plan.
Start early. Ideally, exit planning should commence years before an anticipated exit. To start, you should ask the initial questions about preparedness for an exit and then you should provide the needed guidance to execute on that need to be ready to exit. This provides ample time to make strategic decisions, address potential weaknesses and bolster company strengths.
Assess personal and business goals. Understand what you, as a board member, and other key stakeholders want. Whether it’s a financial return that ensures job security for employees or other objectives, these goals will guide the exit strategy.
Determine business value. Engage professionals to provide an objective business valuation. Understanding your company’s worth in the current market sets a benchmark and may guide growth strategies.
Optimize operations and the related reporting dashboards. In exit planning, a company should always be streamlining and bolstering operations to maximize value. This can range from optimizing financial performance to addressing any existing liabilities or operational inefficiencies. Optimally, your company will create repeatable processes and a dashboard of operations that can easily be shared with any outsider, including a prospective buyer.
Consider roles. If your company is a family business, who will take over? If selling, who will lead during the transition? These are crucial considerations that can greatly impact the success of an exit.
Engage experts. Exit planning is multidimensional, involving legal, financial, operational and sometimes emotional aspects. Lawyers, accountants, wealth managers, investment bankers and even certified exit planners can provide invaluable guidance. Build (or improve) the team of outside advisors now and have them execute the exit plan with management on a consistent basis.
The Board’s Role
As a board member, you play an instrumental role in this journey of exit planning. And as you already know, you must stay out of the weeds, yet you must be prepared to help management mitigate those weeds, because exit planning is often the last thing that they want to do, yet the most essential.
Understand your company’s valuation at all times. Make sure that someone is reporting to you on the valuation of the company, the value drivers of the company and the plan to increase that valuation each year. Ensure that you understand how that valuation is reached and how reliable it is. Learn the valuation methods and be able to ask knowledgeable questions.
Ensure that management is performing well in its ability to compile and present all necessary due diligence documents. This includes financial statements, contracts, legal documents and an operational dashboard, which is practiced through board meetings and management presentations to the board each quarter.
Make sure your company has a financial officer, preferably a CFO, who is responsive. One of the most common complaints in selling a company is a CFO who is not responsive nor fully engaged in the exit planning and actual exiting process. Get the right person on staff. Enable the hiring of the person who knows how to create and find the necessary documents for an exit (because these are what actually transfer value successfully) and who can build the financial dashboard so that financial due diligence, especially quality of earnings assessments, can be completed efficiently and successfully.
Lead the effort toward understanding who prospective M&A advisors and legal counsel can be, as well as likely buyers. There is nothing wrong with engaging prospective buyers well before a sale, even years beforehand. Board members can be instrumental in helping owners better handle these interactions and relationships.
Develop a command of the strategic options for an exit. Your owners may determine that they want to improve the value of their asset and sell the company in the near term. They may decide that they want to own the company for the next 25 years but, even so, the company should always be ready for sale in case the company does need to be sold.
Two more essential parts of the board’s function include making sure that exit planning becomes and remains a priority and that there’s a structured process in place, and ensuring the necessary resources (both time and financial) are allocated for effective exit planning.
Challenges to Anticipate
The first challenge a board must be ready for is emotional complexity. For many owners, the company is their life’s work. Emotions can cloud judgment or hinder necessary decisions. Recognize this and be prepared to seek external viewpoints.
The second challenge is market variability. Economic conditions at the time of your exit might not be optimal. By planning ahead, you can choose the most opportune moment or point in the natural economic cycles, rather than being forced into a decision.
Stakeholder resistance will also have to be prepared for. Not everyone may agree with the chosen exit strategy. Clear communication and alignment of goals are crucial.
Exit planning is not just an endgame strategy; it’s a holistic approach to business stewardship. As board members of private companies, you hold the torches of preparedness and foresight. Ignoring exit planning is akin to designing and constructing a beautiful building without an exit door — it may look great for a while, but when the time comes to move on, it can become a trap.
Enjoy getting started. Engage in board discussions, then discussions with management. Seek expert advice and lay down the roadmap for the future. In doing so, you not only secure optimal outcomes but also ensure the legacy of the enterprise you’ve so diligently guided and overseen.
Justine Tobin is an advisory board member of First Citizens Bank Charlotte Metro and Mobilads, and the founder and CEO of Tobin & Company Investment Banking Group and Tobin & Company Securities, a licensed broker-dealer.