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"CEOs: Pay Attention to Exit Strategies NOW, not Later."
By Martin Kupferman, Managing Director
, Accord Capital


According to Tom West, author and long-time observer of the M&A landscape, for every company that’s 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 can’t 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 financial success.

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 suffered.

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 can’t 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 industry’s 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 can’t, 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 and directly.

Develop depth of management and a succession plan. Buyers know that sellers don’t 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 business.

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 won’t jeopardize the sale.

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 mkupferman@accordcapital.com or visit www.accordcapital.com.

©2002 by Martin Kupferman / All rights reserved.


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