Pay Attention to Exit Strategies NOW, not Later."
By Martin Kupferman, Managing
According to Tom West, author and long-time observer of the M&A
landscape, for every company thats sold, another two to three
are put on the market without success (The 2001 Business Reference
Guide). Therefore, the need to be strategic in planning for
the sale of a business seems self-evident; yet often it is the exception
rather than the rule. In fact, when it comes to selling their businesses,
owners and key executives are more prone to churning than planning.
Sometimes sellers cant find the right
buyer at the right price; other times deals founder on due diligence
issues or change of financial condition by buyer or seller.
But the good news is this: A lot of this churning
is avoidable through strategic planning and the development of a
good exit plan.
An excellent example of the difference between
having a strategy for growth and an effective exit plan is in the
sale of Pasqua Coffee, a company I started with a business partner
17 years ago. By the time it was sold to Starbucks in 1999, it had
grown to 60 retail stores with $28 Million in sales and strong unit
economics. After several years as one of the pioneers in the specialty
coffee industry, Pasqua had become one of a few super regional companies
with a branded offering. We could have sold the company then and
achieved our goals of creating a branded consumer product and achieving
However, like many entrepreneurs, we were
focused more on day-to-day operations of the business rather than
on achieving our ultimate goals. You might say we were too busy
driving the car to notice the exit signs on the freeway! Ultimately,
we took on expensive private capital and embarked on a major growth
spurt that returned mixed results. Part of the problem was Starbucks.
It was ramping up quickly, and began to dominate the market for
real estate, investor capital and consumer recognition. In short,
the coffee bar market was maturing quickly, which caused our Board
to embark on an M&A tear that was both unstructured and opportunistic.
Management became distracted and operating results suffered. The
company became over shopped and, ultimately, the selling valuation
The key lesson here is that the dynamics affecting
valuation are many and powerful. Business owners and key executives
need to be on top of these forces at the same time that they're
running their business. They need to develop a strategic approach
to exit as soon as they begin to contemplate selling. In short,
entrepreneurs need to act more like professional investors.
This kind of action falls into two main baskets.
First, monitor the things you cant control such as
the environment on a regular basis. Track M&A deals,
industry trends and the evolution your competition. This means:
1) Understand the metrics of your business
and how it measures up to the competition.
2) Identify consolidating activity in
your company's ecosystem. (This may include companies you supply
that may be in consolidation mode.)
3) Monitor changes in your industrys
sex appeal. (Ask anyone selling an Internet company today vs. 1999.
Industries do go in and out of favor.)
Second, you must develop a plan to manage
the issues you can control. The following are those which demand
the most attention:
Articulate your business strategy and show
how well your company is positioned. In short, draw prospective
buyers a roadmap to the upside potential of the company. Sometimes
this means updating your plan. Or it may mean changing strategic
direction and making new inroads in developing more profitable lines
of business or withdrawing from others.
Align stakeholder interests around the prospect
of an exit, especially shareholders and senior managers. If you
have dissident or difficult shareholders around this issue, try
to strike an agreement. If you cant, try to buy them out.
The same deliberate approach applies to senior managers. You need
them on board, which means you need to address their concerns honestly
Develop depth of management and a succession
plan. Buyers know that sellers dont linger after a sale. Making
the effort to identify and train your successors will help reduce
buyers concerns about post-close management. Plus, you will
foster higher valuation and make it easier to resist an earnout.
Bolster your ability to produce good numbers.
This applies to everything from an audited P&L to solid management
information. Buyers want to know that their due diligence information
is sound, and that they have the numerical basis for managing the
Bulk up through acquisitions, alliances or
major sales. Valuation bears some correlation to size, owing to
the high cost of the acquisition and integration process. Buyers
want to get the most possible to cover these fixed costs . . . to
get the most benefit from an acquisition.
Address the skeletons in your closet. Legal,
tax, real property, lease or intellectual property issues all have
a way of surfacing in a deal. If handled poorly, these problems
can hijack and prolong the due diligence process. By addressing
them ahead of time, you can have a better chance of resolving or
presenting them to the buyer in a way that wont jeopardize
In summary, M&A success is not just a
matter of having a good sales process. It results from steps you
take ahead of time.
Martin Kupferman is Managing Director of
Accord Capital, a firm helping owners of mid-sized businesses sell
their companies through M&A planning and execution services.
Contact him at 415.461 or e-mail him at firstname.lastname@example.org
or visit www.accordcapital.com.
©2002 by Martin Kupferman / All rights reserved.
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