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M & A: Formulating an Exit Strategy

June 2017 Newsletter Article When company owners consider long-term planning for a business, they must include an exit strategy in this analysis. This is true, especially, since they may have little control over the circumstances necessitating an exit, including exactly when such exit will occur. An exit strategy is a means for transferring ownership of a business to a third party or recouping investment in the business. Common exit strategies include acquisition, management buyout, or the sale of equity. An exit strategy strongly affects the operations of a business from the first day of its existence. For example, if an owner plans to pass ownership of a company to family members, there must be a plan and timetable set forth at some point early in the entity's existence for training and assimilating these individuals into the business. *Liquidation/Outright Sale While this may not generate the most revenue, a simple approach is to liquidate everything at market value and use the proceeds to pay any remaining debt. An outright sale is another simple approach which may allow for a seller to acquire equity in the buying company, allowing it to earn future dividends. *Merger and Acquisition Despite the benefit of liquidity, an acquisition, and even a merger may cause significant changes to management while substantially changing a company's operations, staff, and business lines. A buyer often incorporates or merges services of a company into its own product or service offerings. An example of this is Google's acquisition of YouTube. *Management Buyout A management (or employee) buyout, a recapitalization and sale of the company to the next generation of managers, is normally financed through some combination of debt and private equity investment, with the debt collateralized by the company's assets. It provides immediate liquidity to the owner and early shareholders and allows the company to continue as a private enterprise. The benefit is, of course, a smoother, even seamless, transition for the change of ownership that gains shareholders some liquidity while having minimal impact on the day-to-day operations of employees. *Public Offering (IPO) This is not really an option for a small business since they do not have the scale and growth necessary for a public offering. Businesses offered to the public have increased fees and must adhere to federal regulation such as the Sarbanes-Oxley Act. These companies must also observe a "lock-up period" that restricts the sale of shares, not to mention the risks associated with the stock market. The preparation of an exit from a business requires precise planning and strategizing that is typically an arduous and time-consuming task. In this demanding situation, R. D. Adair, PLLC may provide guidance and assistance for all business owners wishing to formulate a short-term or long-term exit strategy.


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