Exit Strategies: A Three-Part Series

Use this nine-point checklist to avoid leaving things to chance and surprising potential buyers and investors late in the sales process.

As discussed in part one of this series, selling a business can be challenging. Preparing early to address difficult questions about the company’s growth, business model and financial performance, as well as industry dynamics and the relevant regulatory environment, can make the sales process much smoother.

First-time sellers, in particular, may feel a bit overwhelmed by the process. To help you prepare for the event, here we explore nine key things you need to do upfront to lay the groundwork for a successful transaction (see Figure 1). All are critical to the process, and must be addressed concurrently to avoid surprises that can stall or derail the deal at the 11th hour.

Figure 1: Nine-Point Exit Checklist 

Identify your motivation for selling and goals for your life after the sale

At the very beginning, you should start with a blank sheet of paper and write down what’s important to you. Think about your lifestyle and what you hope to do after the sale. Do you want to stay at the company in some capacity and help it achieve its growth targets? Start another company? Focus on philanthropic pursuits and charity work?

The answers to these questions will have a big impact on the type of buyer you’ll seek. “If you believe you’ll need all cash to achieve your post-sale goals, more often than not you’ll require a strategic buyer or a quasi-strategic buyer—i.e., a private equity firm with a platform company,” says Watkins. “On the other hand, if you’re thinking you want to stay involved with the business and maintain an equity stake in it, you’re more likely going to be dealing with a private equity partner.”

Ensure you have the people the company needs in the right roles

Every owner of a growing business knows that people are vital to success. But does your company really have all the right people it needs to be most attractive to buyers and investors? An important exercise is to review your organizational chart and just think out loud: “What are we missing?” The answers can be enlightening. 

You may, for example, find that you have a great chief operating officer, but she’s doing too much. To keep her thinking strategically, you might need to hire a vice president to handle the supply chain and another to look after manufacturing. Or you could determine that your chief financial officer, while capable of producing sound financial reports, may not be able to answer questions from sophisticated private equity investors or large corporate buyers in a way that will help maximize the company’s value. Or you could realize that you’ve been getting by without a true chief technology officer so far, but the importance of technology to today’s business now requires you to have one.

As part of this organizational assessment, consider creating incentives that encourage people to stay through the transition—for example, some type of incentive or stay bonus that allocates compensation to key talent.

“Certainly, it’s money out of the owner’s pocket,” observes Watkins. “But it’s a way to create more of a sense of teamwork and commitment to the process. These incentives also show your awareness of the natural anxiety key executives feel during a liquidity event.”

Create an achievable growth plan with management

Your company’s cash flow and margins are definitely important to strategic buyers and investors. But even more important is how you plan to grow the business—especially today, when market equilibrium is yielding double-digit EBITDA multiples across many sectors. You’ll need to be prepared to explain in detail to prospective buyers how you plan to grow and how you’ll generate your revenue—by product, service, customer and market. Also consider pulling together a realistic budget for the current year.

Be ready to explain in detail how you plan to grow the business.

If you are promising organic growth, you’ll have to describe the source of that growth: doing more business with existing customers, diversifying the customer base, expanding geographically, pursuing service or channel extensions, or rolling out a steady stream of innovative new products. If your anticipated growth also includes acquisitions, you must be able to tell a strong story about your acquisition pipeline and, even more important, be able to describe your track record in successfully executing past acquisitions (including a few compelling case study examples).

Whatever your growth plan is, it needs to be achievable and credible. “When you think about financial projections, you don’t want to put something in front of a group of investors that is just pie in the sky, because that immediately hurts your credibility and puts you on your heels,” says Watkins.

You also may want to consider commissioning a market study, by a recognized independent third party, as an input to your growth plan. Such a study provides rich data that can help your growth plan stand up to buyer and investor scrutiny. These studies typically look at market size and fragmentation, overall market growth, customer needs, major competitors and possible threats to the business, and key themes and trends—all points that could influence your ability to achieve your growth goals. These studies can also help facilitate the early foundation of an acquisition plan and targets, thereby advancing your growth strategy.

Review the condition of your facilities

In some ways, selling your business is similar to selling a home. Just like a home seller may engage in improvement projects before listing and even stage the house to present it in the best possible light, you’ll want to make sure your facilities look as good as possible. That could be as simple as walking through the plant or office during hours of operation to confirm it’s clean, tidy and safe.

You also may want to consider proactively conducting a phase-one environmental assessment to confirm your facilities comply with relevant regulations, including ones you may have assumed as part of an acquisition. Yes, it will cost money, but it’s money well spent. Beyond generally helping you remain a good steward of the business, such an assessment can head off surprises that could scupper a sale.

Another important dimension of a facilities review involves growth and maintenance capital expenditures. You’ll need to demonstrate that you either have capacity to handle projected growth, or that you have a capital plan for building that capacity. And you should be able to produce a detailed five-year history of both growth and maintenance capital investments you’ve made in your facilities, which will help investors and lenders better understand the cash flow dynamics of the business.

Confirm your status on key legal and regulatory matters

A whole host of legal and regulatory issues could make a sale more complicated if they’re not identified and dealt with in advance. You should identify, and be prepared to discuss, any meaningful contracts, change-of-control provisions, outstanding liabilities and licensing requirements that could influence the value of your business or make it more difficult for you to exit.

For example, are you comfortable with the stage of your union contract’s lifecycle? Do any family members have buy-sell agreements that need to be considered? Are there provisions within licensing agreements that allow customers to review—and potentially cancel—their license in the event of a change in ownership?

Similarly, you need to confirm your company’s status with regard to regulatory compliance to ensure you comply with all relevant laws, policies and regulations, and that you’re up to date on all required permits. “While it likely would take a major issue in this area to derail a potential sale, doing your own due diligence on compliance up front will help you flag areas of concern—which is also valuable even if you don’t end up selling,” says Watkins.