Issue 25

Exiting Your Business Without Leaving It

More and more frequently, business owners are telling their advisors, "I'd like to back away from my business. I'd like the freedom to do whatever I want, whenever I want. I don't want to worry about money. But if I sell, I'm unlikely to get enough cash in today's merger and acquisition marketplace. If I could cash out, where could I invest and generate a reasonable rate of return? Don't even think about suggesting that I put my money in the stock market!! Even if I were foolish enough to let you do so, I doubt you could match the return I get on investments in my own business."

Faced with limited prospects, owners often wonder if, rather than exiting, they can "back away" from their companies. They contemplate treating their companies as more of an investment while continuing to own it.

Many owners realize that the recent merger and acquisition market has contained few cash buyers. Consequently, owners are reluctant to offer their companies for sale. They are convinced that there is less risk in keeping their businesses—at least in the short term.

In addition to a scarcity of cash buyers, the merger and acquisition market is no longer supporting the valuation multiples of six or seven times EBITDA (Earnings Before Interest, Taxes, Deprecation and Amortization) widely achievable just a few years ago. Instead, most industry sectors have seen a decrease in valuation multiples of 20 to 50 percent.

It is difficult to dispute that the dearth of cash buyers willing to pay fair value for successful companies and poor alternative investment opportunities are certainly sound reasons for owners to choose to stay in their companies. The issue for many owners then is: how do I back away and let others run the business without transferring ownership and control?

The answer is to engage in Exit Planning as if you were going to exit your business. After all, someday you will exit—even if you are carried out on a stretcher. As a subscriber to this newsletter, you know that traditional Exit Planning enables you to orchestrate a successful, permanent exit. Intermediate Exit Planning, however, enables you to forge a path toward an exit without giving up ownership.

In order create an intermediate Exit Plan, you must:

  • Establish your (owner-based) on-going business objectives;
  • Determine future cash flow needs for yourself and for your business; and
  • Build a stronger business defined as one capable of running without you.

Let's look briefly at each component.

First, working with your Exit Planning Advisors, establish your timetable for backing away from your business. Communicate your wishes clearly: What does backing away mean to you in terms of time commitment, emotional involvement, financial guarantees, etc.?

Second, you must determine the amount of income that you need the business to provide you. Ask members of your Advisory Team to help you make this determination.

Third, the characteristics of a "stand alone" business (one that can run without you) are the same characteristics third party cash buyers look for. A company that can be managed from a distance and that is able to pay adequate cash flow with little risk of nose-diving without its owner at the helm, is a highly-attractive business. It is valuable both to third parties and to the owner who wants to step away. To create that type of business, you must have in place critical Value Drivers. They are:

  • Increased cash flow
  • Operating systems that improve sustainability of cash flows
  • Improved facility appearance
  • Debt reduction
  • Documented sustainable earnings
  • Growth strategy; and
  • Strong management team

When you work with your advisors to fashion your "stand alone" business, pay particular attention to creating repeatable, sustainable internal systems and developing and properly motivating your management team. In order to run successfully without you, your company needs systems and management in place capable of replicating your leadership.

The most valuable businesses are those in which the owners are no longer valuable. Using intermediate Exit Planning, you can prove that axiom. Planning to step away can create a more vibrant business. When your day of departure does eventually arrive, both you and your business will be prepared.

Subsequent issues of The Exit Planning Navigator® discuss all aspects of Exit Planning.