Liquidity and Exit Planning | COVID Underscores the Need to Plan Now

DGP Capital Business Owner Tools, Coronavirus, Economics, M&A


SUCCESSION PLANNING for an EXIT EVENT or SALE:  It’s Even More Necessary Now

As a business owner are you thinking about retiring, or at the very least, seeking liquidity to de risk the concentration of your net worth? Most business owners have a vast majority of their net worth and assets tied to their existing business, which in itself presents risks, similar to having “all of your eggs in one basket”. Have the health threats from COVID prompted questions regarding succession planning?  Have the economic impacts of 2020 affected how you expect to exit your existing ownership in a business?  Do you have planning in place to address and reach those objectives?  

VALUE OBTAINED BY PLANNING

Exit and succession planning can take a variety of forms, including a sale to third-party such as a strategic acquirer or private equity firm, a sale to existing management, or a recapitalization transaction that provides liquidity to existing ownership.  The sale of a business is a complex transaction involving multiple steps and extensive planning; deals that fail typically do so due to poor pre-sale planning and preparation.  Even when a transaction is consummated,, poor preparation often leads to a lot of potential money being left on the table, as business owners often fail to recognize and leverage the true value of their business.

Proper planning, which includes retaining key management and succession planning, enables sellers to obtain a premium valuation during an exit event.. DGP Capital is a full-service M&A advisory firm, with an experienced team of professionals with a combined $15 Billion in transaction experience.  We can advise and help you develop a full-spectrum plan so that you can attain your personal objectives, while maximizing the value of your business. 

Obtaining a premium valuation and attracting multiple suitors during the sale process for a business is best accomplished with an intentional plan that often begins years before a purchase agreement is even signed. As such, a succession plan is needed. Unfortunately, this isn’t something that most small to medium sized business owners have done, at least in any substantial way. If you haven’t either, it’s not too late to begin pre-sale planning. Today would be a great time to start and here are a few thoughts from our team at DGP Capital to help get you started.  

PRE-SALE EXIT PLAN

A business succession plan has identified goals, a timeframe to attain those goals, and an outline of the business processes necessary to accomplish those objectives.  
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  • Goals:  Is the business to be transferred to an heir, sold to an outside buyer, offered to a competitor, or arranged for a management/employee buyout?  

    Is ownership held by one, or multiple individuals?  Are all owners clearly aligned on the same goals?  Disagreement between owners later in the process can be disastrous for a sale process, and a third-party such as a M&A advisor like DGP can help identify any sources of conflict or potential issues ahead of time.\

    Identifying your goals is an important factor to determine the appropriate valuation and transaction structures..  Liquidity for the individuals involved, and cashflow for continuing operations, must be carefully identified, and planned for, to realize a successful transaction.
  • Timeframe:  The desired timeframe for any transaction is in large part determined by whether key business processes are already in place, and the business is performing well.  If essential processes, critical to a sale, need to first be identified and then implemented, the timeline for a successful transaction may be significantly lengthened. However, putting these processes in place will yield significant value during a transaction process, and will alleviate potential concerns from acquirers and/or capital providers.  
  • Business Processes:  Acquirers and capital providers want to know that the business they are acquiring or financing has solid and well-documented business processes in place.  The number and type of business processes that need to be documented and thought through varies depending on the industry and business. Examples of business process-related questions that prospective acquirers and capital providers usually ask business owners include:
  • Has the business been maintaining proper accounting records and have those records been audited annually?  Usually a minimum of 3 years will be requested by the prospective buyer and financial institutions.  
  • Are all financial reports available and in good order?  Due diligence by the prospective buyer or capital provider will require comprehensive and accurate financial reports, in order to understand prior financial performance and test any financial projections provided by the business. 
  • Are all operations and processes documented specifying proper protocol and standards?  Are all processes and assets in compliance with applicable safety and government regulations?  
  • Have the required organizational documents, meetings and records been maintained?
  • Has the Intellectual Property of your business been properly secured?  
  • Are there any tax obligations to be disclosed?  Are there any possible litigation issues that present potential liabilities?  

BUILD A TRANSITION TEAM

The list of pre-transaction items to consider and prepare can be quite extensive.  Many business owners and management teams don’t have the time, or the expertise, to ensure all these items, critical to a successful sale, can be identified and addressed; after all, they’re busy running the day-to-day operations of the business.  This is why DGP Capital recommends utilizing a transaction and exit planning team in preparing a succession plan.  Such a plan will not only address your business processes and associated continuity, but also addresses issues such as equity ownership, legal, asset management and capital requirements.  A well-balanced team consisting of professionals with subject-matter expertise will help identify what needs to be done, and will then walk with you through the entire transaction process.

Expert objective advice from outside your business and an aligned team inside your business are essential to obtaining your goals. A unified team inside the business is very important for the transaction and requires skill to create and maintain.  The people in your business, such as your management team and employees in key skilled positions, are integral to what has made your business successful.  Part of the pre-planning process should include how to retain these key employees post-transaction/transition..  A key prerequisite for most acquirers when evaluating a potential target is whether key employees and the management will be retained and incentivized to perform post-transaction..  

Helping your staff understand what is happening in the transaction and that their jobs are stable will depend on what is communicated and when it is done.  Incentives have also proven to be a good value when offered for specified outcomes at the right time in order to demonstrate that they are important and valued.  Impartial outside advice can be very helpful in determining how to retain your valued people during an ownership transition.        

WHERE TO GO FROM HERE?

M&A succession planning is a complex activity that needs to be tailored to your particular situation and business.  Whether you would like to begin developing and grooming a new owner from within your family/business or to begin preparing for an outside acquirer, the experienced group at DGP Capital can assist you in valuing your business, formulate a transaction or exit plan, preparing the company for a transaction, and ultimately finding the best acquirer or capital provider for your unique situation. .  

Start today by receiving select information on this topic via email from DGP Capital, or consider beginning a complimentary, commitment-free  dialogue with us to discuss your particular circumstances, thoughts and goals.  To begin the discussion and to learn more, click here.  

We look forward to learning more about your situation,  and assisting you in identifying potential options with respect to exit and succession planning.