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How Deal Teams Increase the Odds of a Favorable Exit

Gary Ampulski Midwest Genesis | December 9, 2014

Unlike the sale of a home, location is not the most critical factor for the sale a business. With a business transition, it’s timing, timing and timing. Is the business performing at its peak level? Are the capital markets providing attractive terms to finance a buyer’s offer? And finally, is the owner really ready to consummate a transaction? All three of these time-sensitive elements must be in alignment to extract the maximum value for the seller.

But even with those elements on your side, the process can still have significant risk. That late ‘70’s ballad “The Gambler” has particular relevance to this life-changing event. And “If your gonna play the game, boy, you gotta learn to play it right.” Remember the chorus.

So what’s a winning hand and how do you increase the odds of taking the pot when it comes to the sale of a business? Just as in poker, it takes skill, a mastery of the rules and psychology. But unlike poker, you are gambling with your life’s work. In addition to the buyer, you are playing against the IRS, the capital markets, competition, your plans for life after the transaction, and in some cases, even your own health. But how do you tilt the outcome in your favor?

First and foremost: you don’t have to play this game alone. A team of experts can increase the odds that you will walk away a real winner if you know where to find them and how to use them. That, and a plan to accomplish what is needed is key to countin’ big “when the dealin’s done.” Here’s how it can work in the owner’s favor.

Start with a goal and develop a plan.

It’s amazing how many business owners have great plans for their companies but have given little thought to their own future in it. How many times have you heard “I have no intention to go anywhere. I’ll be here until they carry me out in a box!” Maybe, but is that really the best for those left behind? That kind of outcome can be a big mess for someone else to clean up. The cost in time, money, anxiety and lost value can be significant. Not exactly the memory an owner wants to leave behind.

A goal is also critical because in the words of the Cheshire Cat “If you don’t know where you’re going, any road will get you there.” When it comes to transitioning a business, between the internal and external transfer options, there are at least 7 alternatives and over 30 methods to accomplish those objectives. Choosing the right combination is a function of the owner’s motive and desire to be part of the solution. Wouldn’t it be smart to understand all the options before making a final decision? Not all alternatives may be available to every owner, but the real work begins once a decision is made and an implementation plan is developed. A good exit planning advisor is invaluable in laying out the possibilities and helping with the subsequent steps. Here are some other helpful tips.

Put together a complete team of experts to make it happen.

So who should be on the execution team? Some are evident, some are less so. But all have a key role to play. A complete team will include a financial advisor, attorney, CPA, insurance professional and possibly an investment banker.

Appoint someone as the lead advisor.
A team with a quarterback who doesn’t know how to play the game or understand what must be done and when, is like a ship without a rudder. The lead advisor must also have access to a network of other experts who can be pulled into the process when needed. This person should be held accountable for progress and the net results.

Get a capable deal attorney.
This is not a relative or acquaintance. It should be someone who has got “in house” access to specialists experienced with estate planning, business, tax and M&A issues. Sounds obvious. But what’s not so apparent is when to get this advisor involved. Unfortunately, many business owners do this after a signed offer is on the table. That’s not nearly enough time for the attorney to address potential legal issues, and efforts to do so in the middle of a transaction makes them look like “deal killers.” In reality, they are just trying to protect their clients.

Hire a good CPA.
It goes without saying that a good CPA can ensure accurate financial statements and present the company in the best possible light, which is key to preventing an eroding offer. In addition, they can develop solid tax strategies with careful planning to legally reduce, defer or eliminate capital gains, ordinary income and inheritance tax.

Consult an independent insurance planner.
Life and disability insurance can manage the risk of loss and can provide income replacement in the event the owner is not capable of performing his or her duties. Life insurance can also be used to fund the transfer of the business from one generation to another, used to pay estate taxes and may not be subject to income tax. A thorough review and audit of all existing policies will help eliminate a big disappointing surprise down the road.

Retain a financial planner.
Many business owners make decisions to sell based on assumptions about what they need to retire. Most of the time these are nothing more than a “less than educated guess.” Receiving a check for the net proceeds at closing may seem like “wining the lottery”, but you’d be surprised how little that could stretch. A good financial plan can address the question of how much is needed to accomplish an “after business life goal”.

Engage an investment banker.
An investment banker may not be needed if ownership transfer is an internal one, but absolutely essential if you want to launch and manage a formal sale process. They can provide invaluable advice on market timing, market value of recent comparable sales and can present the business to both strategic and financial buyers. Some have specific industry experience. But all are highly transaction focused and are paid on a success fee basis. That can lead to a “any sale is better than no sale” mentality. Whomever the owner picks to represent him, they must be trustworthy.

There are many more participants that can contribute to the planning and transaction process such as valuation experts, the existing management team, perhaps family members, and others but those identified here are critical to a successful outcome. A good team, leadership and a plan are the three legs of the transition stool. Doing it right will help to ensure that when the dealin’ is done there are enough chips in your pocket to either play again or do something else, in the style you deserve.

Axial is the deal network for the middle market.

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