The Importance of Planning and Preparing to Exit 

Business owners need to plan and prepare for the inevitable exit, and they must start planning well in advance of their anticipated exit date. There are many motivations for business owners to exit including a desire to retire, health or financial issues, a strategic sale, or an interest in starting a new venture. Some entrepreneurs start their businesses with the intention to exit quickly and aim to make a high-growth venture easily sellable. For others, growing their company is a labor of love, and exiting is not top of mind. The procrastination of exit planning can cause complications for both the future of business owner and their company.

Planning for an exit early can ensure a smooth and lucrative exit. Positioning a company for a lucrative exit will take advanced planning from the business owner. They will need to adequately prepare themselves and their company in addition to utilizing a trusted M&A advisor to achieve a high valuation and execute the exit plan. This blog will discuss when to start planning for an exit, factors to consider in an exit plan, and how to prepare for the exit.

When should I start planning my exit?

It is crucial to start planning your exit strategy as early as possible. A business owner should start thinking about their exit as soon as they start their company because they can gradually plan for their exit as the company grows. While the exact timeline may vary depending on the type of business and personal circumstances, it is never too early to consider different exit options. Waiting too long to plan an exit can lead to unfavorable outcomes. It's important to start planning early to maximize the value of the company and ensure the business owner can have a smooth transition exiting the business.

There is not one ideal exit because every exit plan should be extremely personalized and tailored to the unique goals and aspirations of each business owner. Some business owners may envision passing their company down to family members or trusted employees, while others may opt for a planned dissolution or seek a buyer for their business. However, for those considering a sale of their company, meticulous exit planning becomes even more essential, especially if they have specific sale or value targets in mind.

One popular option for an exit plan is handing over the company to someone else, whether it be a family member or a key employee. Unfortunately, many owners make the mistake of assuming their children or designated successors will seamlessly step into their shoes without actively involving them in the exit planning process. This mistake can cause a multitude of problems including the owner being caught by surprise when their chosen successor declines to take over the business. Thus, business owners must engage their intended successors in the exit planning process from the outset. By including them in discussions and seeking their input, owners can gain valuable insights into their successors' desires, capabilities, and readiness to assume leadership roles. This proactive approach not only fosters alignment and transparency but also minimizes the risk of last-minute surprises or rushed decisions when it's time to pass the torch. Ultimately, communication and collaboration between current and future leadership are essential for ensuring a smooth and successful transition of ownership.

Selling a company either to an inside or outside buyer is a popular exit plan among business owners. These business owners should start envisioning what they want the sale of their company to look like and incorporate that vision into their exit plan. When selling a business, there are many ways to structure the transaction, and business owners need to consider what structure, or structures align best with their goals. An M&A advisor can guide business owners through various transaction structures and their nuances to help the business owner make an informed decision when approaching the sale of their company.

All business owners need to be aware that they will often have to stay at their company for a designated period of time to help with the transition post-transaction. Often, business owners overlook this transition period when planning for their exit. When building an exit plan and exit timeline, the business owner needs to not only consider the time it will take to launch the company and find a buyer but also the possibility of a transition period. Business owners should be prepared to be involved in the transition of leadership and should not be shocked when they are not able to immediately walk away post-transaction. Additionally, business owners need to think about the target valuation for their company when they exit.

Business owners who plan for the eventual sale of their business are more likely to achieve their desired valuation. By starting the exit planning process early, owners have the opportunity to strategically improve and expand their business in order to achieve the desired valuation. These improvements could include optimizing operations, diversifying revenue streams, strengthening market position, etc. With careful planning and execution, owners can effectively position their company to appeal to buyer interest ultimately reaching a higher valuation, thus increasing their chances of a successful and profitable sale.

Many business owners intend to depend on the money from the sale of their company for retirement. For these individuals, it's crucial to figure out how much money you need to support their desired retirement lifestyle. By setting a clear financial target, business owners can plan their exit strategy accordingly, whether it involves maximizing the sale price, structuring the deal for tax efficiency, or implementing wealth preservation strategies post-transaction. Planning for retirement alongside the exit strategy ensures that business owners are fully prepared to transition into the next phase of their lives with confidence and financial stability.

It is important to start planning an exit strategy as early as possible while building a company. Considering different exit options from the beginning allows business owners to gradually tailor their exit strategy as their business grows. The timeline for exit planning may vary depending on individual circumstances, but starting the process sooner rather than later is crucial to avoid unfavorable outcomes and ensure a smooth transition. To craft a successful exit plan, the business owner needs to personalize it according to their unique goals and aspirations. Whether a business owner plans to pass the company down to family members, sell to an outside buyer, or opt for a planned dissolution, meticulous planning is essential, especially if you aim for a sale with specific valuation targets in mind.

How to Prepare for an Exit?

As the business owner nears their desired exit date, meticulous preparation becomes imperative to ensure an efficient execution of their exit plan. An essential aspect of this preparation involves considering the individuals who may be affected by the exit, including employees, suppliers, customers, and family members. Recognizing the potential impact on these individuals, business owners should initiate internal conversations within their company to proactively address concerns and prepare for the transition.

Internally, fostering open dialogue and transparent communication is key to mitigating any uncertainties or apprehensions surrounding the impending exit. Employees may be concerned about job security or changes in company culture, while suppliers and customers may seek assurances about continuity of service or product delivery. Moreover, involving family members in discussions about the exit ensures alignment of expectations and facilitates a seamless transition of ownership or leadership.

These conversations will be different depending on what exit strategy the business owner has chosen. If the owner plans to sell their company, it is crucial to maintain discretion. Only individuals with a legitimate need to know, such as key employees who are directly involved in the transition process or trusted advisors, should be informed of their intention to sell the company. It is essential to limit the dissemination of this information to maintain confidentiality to prevent negatively affecting a possible transaction.

Maintaining confidentiality surrounding the sale is critical for ensuring a successful transaction and maximizing valuation. For example, if customers learn that the owner is planning to sell the company, they may become anxious about how it could affect them and decide to take their business somewhere else. This could lead to a significant decline in the company's revenues, making it difficult to find interested buyers and achieve a high valuation for the company. Ultimately, confidentiality is key as broadcasting the possible sale of the company to anyone could ruin the chances of completing a successful transaction.

Internally, transparency remains essential, albeit within a limited circle of trusted individuals who play a pivotal role in executing the exit strategy. This may include key management personnel tasked with facilitating the transition, legal and financial advisors providing strategic guidance, and succession candidates being groomed for leadership roles. By selectively sharing information with those directly involved in the exit process, business owners can uphold confidentiality while ensuring necessary preparations are made to facilitate a seamless transition.

As business owners prepare to sell their company, hiring an M&A advisor becomes essential for achieving a successful exit at a high valuation. Early discussions with M&A advisors are crucial to prepare for the exit adequately. These advisors bring specialized knowledge and experience, guiding owners through market trends, valuation methodologies, and deal structuring. They streamline the process by conducting due diligence, identifying risks, and preparing documentation. Initiating conversations early allows for goal alignment and strategic planning, ensuring a smooth and lucrative exit.

As part of the exit preparation process, one crucial step is to gather and prepare the financial statements for the company. Over the years, accounting practices may have become neglected, resulting in disorganized and messy financial records. The business owner must allocate time and resources to rectify any discrepancies and ensure accuracy. During this time the business owner should thoroughly review the company's financial records, including income statements, balance sheets, and cash flow statements. This may involve reconciling accounts and identifying and correcting errors. At this time, business owners should separate any personal expenses from company expenses. Removing personal expenses from the company’s financials is generally a good practice but it will also help make the company’s bottom line look better to buyers.

It's crucial to organize clear and concise financial statements, as they serve as important documentation during discussions with M&A advisors and potential buyers. A well-prepared set of financial statements will instill confidence about the company's financial health in buyers and help to facilitate transparency, which can expedite the due diligence process.

Additionally, business owners should assess the organizational structure and operational processes to identify any areas that may require adjustment or reinforcement in anticipation of the exit. This could involve delegating responsibilities, documenting critical procedures, or implementing succession plans to ensure business continuity post-exit. By proactively addressing the impact of the exit on various stakeholders and operations, business owners can mitigate potential disruptions and pave the way for a successful transition.

As business owners approach their planned exit timeline, it is essential to prepare meticulously to ensure a smooth execution of their exit strategy. This involves taking into account the concerns of stakeholders such as employees, suppliers, customers, and family members through internal dialogues within the company, which should address any concerns transparently. To maintain discretion and optimize valuation while planning to sell the company, confidentiality is crucial, requiring limited disclosure. Open communication among key personnel, advisors, and succession candidates ensures confidentiality while preparing for a seamless transition. At the same time, organizing financial statements, reviewing records, and separating personal expenses from company finances enhances accuracy and attractiveness to potential buyers, expediting due diligence. Assessing the organizational structure and processes is also crucial in identifying areas needing adjustment for post-exit continuity. This ensures a successful transition with minimal disruptions.

The Role of the M&A Advisor

Business owners should not hesitate to contact an M&A advisor as they work towards planning and preparing for an exit. Working with an M&A advisor early in the exit planning process is beneficial because the business owner can rely on the advisor for guidance during any stage of their exit planning journey. An M&A professional possesses the expertise and insights that will ensure business owners are properly prepared to exit their company. M&A advisors offer a fresh perspective about the viability of different exit options, as well as provide new ideas and innovative strategies. Business owners can leverage an M&A advisor’s objective viewpoint to formulate and execute an exit strategy with clarity and confidence. Whether a business owner is in the early stages of contemplating an exit strategy or well into the process of preparing and executing their plan, an M&A advisor can provide valuable assistance that significantly enhances their chances of achieving their desired outcome.

M&A advisors support business owners throughout the entire exit journey. Business owners should view their M&A advisor as a partner that will help them overcome obstacles, maximize efficiency, and achieve a high valuation by handling the complexities of a transaction. Engaging with an M&A advisor is a strategic investment in the success of the exit process, as they act as advocates for their clients, working tirelessly to ensure their interests are safeguarded and their objectives are met.

Final Thoughts

Planning and preparation are crucial for a successful exit that secures the future of the company that the business owner worked hard to build. Initiating the exit planning process early is important, allowing business owners to tailor their strategies to align with their unique goals and circumstances, ensuring a smooth transition. Thorough preparation, including organizing financial statements, reviewing records, and assessing operational processes, enhances the company's attractiveness to potential buyers and expedites due diligence. Whether a business owner is in the early stages of contemplating an exit strategy or well into the process of preparing and executing their plan, an M&A advisor can provide valuable assistance that significantly enhances their chances of achieving their desired outcome. By prioritizing early planning, transparent communication, confidentiality, and thorough preparation, business owners can navigate their exit with confidence, paving the way for a successful transition and the realization of their desired outcomes.

 

Written by Brigitte Grava

21 March 2024

 

Versailles Group, Ltd.

Versailles Group is a 37-year-old boutique investment bank that specializes in international mergers, acquisitions, and divestitures. Versailles Group’s skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues greater than US$2 million. Versailles Group has closed transactions in all economic environments, literally around the world.

Versailles Group provides clients with both buy-side and sell-side M&A services and has been completing cross-border transactions since its founding in 1987. 

More information on Versailles Group, Ltd. can be found at  www.versaillesgroup.com.

For additional information, please contact

Donald Grava

Founder and President - Versailles Group, Ltd.

+617-449-3325

What exactly is an LOI and how does it play a crucial role in M&A transactions?

Definition 

A letter of intent (“LOI”) is a written expression, usually from buyers, that documents the buyer’s proposed price and terms including transaction structure, timeline, due diligence, confidentiality, exclusivity, etc. In many cases, the LOI is the first document negotiated between the buyer and seller.

Common Misconceptions

The LOI is the most misunderstood document by first-time sellers. Many think that it is a contract between the buyer and the seller. The LOI is a document that signifies acceptance and interest, similar to nodding your head. In other words, the LOI documents the intentions of the buyer and seller to complete a transaction. Sellers should be aware that there might be tricks hidden within the LOI like misleading language and concealed contingencies that require the expertise of both an M&A advisor and an attorney to identify and provide guidance on. 

Binding vs. Non-Binding Nature

Typically, this document is non-binding and most LOIs clearly state that it is non-binding. Rarely, an LOI will contain a provision stating it's binding; however, it might be difficult to enforce a binding LOI as the nature of this document is non-binding. While the LOI is non-binding, all LOIs contain certain provisions that are binding, e.g., confidentiality, exclusivity, expenses, jurisdiction, etc. These binding provisions must be followed and, if not could result in the deterioration of the transaction and possible legal action if they are not. 

When a buyer is interested in purchasing a business, a typical first step is for a buyer to make an offer for the business via an LOI. Upon receipt of an LOI, a seller will consult their M&A advisor, attorney, and possibly other professionals to develop a response strategy. Most of the time, the seller will respond, via their M&A advisor, with a counteroffer which leads to the negotiation of the LOI’s terms by the buyer and seller. After negotiations are concluded and both parties settle on agreed terms, the next step is for the seller and buyer to execute the LOI. 

The signed LOI documents the buyer’s proposed purchase price and terms including transaction structure, timeline, due diligence, confidentiality, exclusivity, etc. Sometimes, the LOI is also called a Memorandum of Understanding (“MOU”), Indication of Interest (“IOI”), or a Term Sheet. Once the LOI is signed, due diligence begins, during which the buyer confirms the condition of the business. Before signing the LOI, the seller should confirm the buyer’s ability to complete the deal. This would involve the seller ensuring the buyer has the funds or capability to raise the funds to complete the purchase. 

One of the challenges that the LOI presents for a seller is the buyer’s valuation of the business.  Some buyers include an outsize valuation to entice the seller to accept. Once the buyer “locks up” the deal and the transaction progresses, they then will lean on complicated language in the LOI or use excuses like unreasonable working capital provisions to negotiate the valuation down. In other cases, the buyer will mention unsaid assumptions about performance expectations, etc. to lower the valuation. The price agreed upon in the LOI will almost always be negotiated throughout the entire duration of the transaction, so the seller needs to be aware of the buyer's incentives and tactics to drive the valuation down. Most importantly, the seller should rely on their trusted M&A advisor to help them achieve the purchase price they deserve for their business. 

Business owners who sell their business without an M&A advisor almost always regret it and end up unsatisfied with the sale. When reviewing an LOI, sellers should always ask their M&A advisors about a buyer’s reputation and ability to complete the transaction. An experienced M&A advisor has the knowledge and tools to be able to evaluate if the buyer is capable of completing the transaction at the agreed-upon value and if they will be fair in the negotiations. 

The seller should always ask buyers directly about how they arrived at their valuation, which is often some multiple of revenue or EBITDA. When a buyer provides little information about the valuation, it may be inferred that the buyer is inexperienced, uncertain, or hesitant about the transaction. Alternatively, the buyer’s behavior could indicate that they are attempting to think of ways to reduce the valuation.

Although LOIs set expectations for buyers and sellers regarding the final terms, it is important to note that LOIs are non-binding as the terms of the transaction may change during the due diligence phase. The terms can change as the buyer discovers new facts about the selling company. Therefore, LOIs are not to be confused with a definitive purchase agreement which is binding between the two parties. The purchase agreement is negotiated and signed after the buyer completes due diligence and both buyer and seller have agreed on all of the terms and conditions related to the transaction.

Although an LOI contains terms that are still negotiable, any changes made to the agreed-upon terms will need to be justified. During the diligence process, the buyer will start to double and triple-check all the seller’s details. As the terms have some flexibility, the two sides can begin negotiations on any sticking points and figure out how to keep the transaction moving towards a closing. It is one of the M&A advisor’s responsibilities to facilitate the buyer’s diligence. This includes reassuring the buyer if some items do not meet the buyer’s expectations and being prepared to negotiate proposed changes to the original LOI terms. 

At Versailles Group, it has been our experience that many sellers view LOIs as binding contracts although they are not.  To reiterate, LOIs are not contracts or binding contracts thus, if a transaction is going to be completed, both sides need to be conscious of the need for fair and reasonable negotiations throughout the duration of a transaction. 

While most of the terms in an LOI are non-binding, this important document may also contain some legally binding provisions, such as exclusivity, confidentiality, etc. It is worth noting that the terms of the LOI are subject to any confidentiality agreement previously entered into by the parties. If there is no prior agreement on confidentiality, the LOI may include confidentiality provisions such that any information shared between the parties will be held in confidence and not disclosed. In other cases, the LOI will contain stricter confidentiality provisions to protect the seller while disclosing much more data during the due diligence phase.

Exclusivity is one of the common binding terms in an LOI and is always demanded by buyers. The exclusivity provision prevents the seller from negotiating or seeking offers from other potential buyers during a specified period. This provision protects the buyer from losing the acquisition to another buyer during the due diligence phase. The buyer wants to have the protection that exclusivity grants as they will need to invest a significant amount of time and money into the diligence phase. The exclusivity period is a crucial term and often determines the timeline for the due diligence process and negotiation of agreements. However, the parties can agree to extend the exclusivity period if needed. M&A advisors know when and how to extend the exclusivity provision. 

Signing the LOI with an exclusivity period takes the company off the market, which means the seller should be sure to do due diligence on the buyer’s financial ability before signing. The deal will not close if the buyer cannot pay the purchase price. Thus, it can sometimes be advantageous to accept a lower price from a financially capable buyer as opposed to a higher price from a potentially financially unstable buyer. An M&A advisor will provide guidance and expertise in evaluating the risks and benefits of different buyers’ reputations, transaction timelines, and purchase prices. Thus, allowing the seller can be confident in their decision to engage with a specific buyer. 

For buyers and sellers, the initial presentation of an LOI and subsequent negotiations is akin to a “dance” between the two parties. This dance is a give-and-take between the buyer and seller and can be challenging due to the length of the exclusivity period. For buyers, the challenge is handling sellers who might play hard to get by offering a very brief exclusivity period because they have other suitors lined up. The buyer will contemplate if it is worth rushing through the due diligence phase and spending hundreds of thousands of dollars to avoid losing the potential acquisition.  

On the other hand, a buyer who casually issues an LOI but then asks for a lengthy 120-day or longer exclusivity period could scare sellers away. Sellers must be aware that a lengthy due diligence period means the company is off the market for a long time. This can be problematic for the seller because if the buyer withdraws after a lengthy due diligence phase, they may need to “relaunch” the company for sale as other potential buyers may have already moved on. Simultaneously, sellers are not keen on exceedingly long due diligence processes as they do not have a clear commitment from the buyer as the LOI is not binding. In these circumstances, an experienced M&A advisor will be able to navigate these complex challenges to mitigate risk and achieve an optimal outcome.

The exclusivity provision plays a significant role in understanding the LOI paradox. Both parties are expected to have trust in each other, guided solely by the brief outlines of the agreement presented in the LOI. Trust between the parties can be difficult to establish at first and will develop over time. The shared experiences of working through the due diligence period and continued negotiation of the terms of the LOI emphasize the delicate balance required as both parties navigate toward a closing. 

After negotiating the terms of the LOI with the assistance of an M&A advisor, it is critical to thoroughly review the LOI with an attorney before signing. The seller should also get advice from their CPA as to the financial structure to mitigate the tax impact. After the execution of the LOI, the sellers need to continue to seek advice and rely on their M&A advisor throughout the whole process. Most importantly, sellers should be careful not to focus only on the proposed sales price as many factors affect how good or bad the deal is for the seller.

Written by Xueying (Gil) He

13 March 2024

 

Versailles Group, Ltd.

Versailles Group is a 37-year-old boutique investment bank that specializes in international mergers, acquisitions, and divestitures. Versailles Group’s skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues greater than US$2 million. Versailles Group has closed transactions in all economic environments, literally around the world.

Versailles Group provides clients with both buy-side and sell-side M&A services and has been completing cross-border transactions since its founding in 1987. 

More information on Versailles Group, Ltd. can be found at www.versaillesgroup.com.

For additional information, please contact

Donald Grava

Founder and President - Versailles Group, Ltd.

+617-449-3325

Projections indicate a rebound in M&A transactions, with a 13% rise in deal volume projected for US private equity and a 12% increase for corporate M&A. This positive outlook for 2024 M&A activity may stimulate greater buyer interest and lead to higher valuations.

 

In the fast-paced world of dealmaking, various economic indicators, geopolitical tensions, and market sentiments are interconnected, which can lead to significant shifts in the market landscape in a short period. Over the past several years, we have witnessed a fascinating journey in M&A activity, from record highs due to favorable economic conditions to sudden downturns triggered by policy changes. This rollercoaster ride offers valuable insights into the complexities of dealmaking and the strategies that emerge amidst uncertainty.

In 2021 and early 2022 historic highs in M&A activity were driven by favorable economic conditions, such as moderate inflation, robust economic activity, and low interest rates. However, the Federal Reserve's historic tightening cycle in March 2022 triggered a sudden pullback, and dealmaking activity slowed significantly as the cost of capital surged, and uncertainties loomed large. Private equity deal volumes in the US were substantially lower in 2023 compared to the peak observed in 2021, with a similar trend observed in corporate M&A transactions. These numbers underscore the ripple effects of macroeconomic shifts on the dealmaking landscape, serving as a barometer of broader economic trends.

Despite the downturn, there are glimmers of optimism for the future, as a CEO outlook survey hints at a renewed enthusiasm for deal activity. A significant proportion of US CEOs expressed interest in completing M&A transactions in the coming months, with joint ventures and strategic alliances emerging as key alternative strategies for navigating uncertainties. This reflects a shift towards collaborative approaches to innovation and growth. The survey highlights the emphasis on investments in generative AI (GenAI), indicating a growing recognition of the transformative potential of emerging technologies. While uncertainties linger regarding the trajectory of AI development, the willingness to invest underscores a proactive stance toward embracing innovation and driving future growth.

There is an optimistic future for M&A, with a gradual recovery in PE M&A activity expected through 2024, following a 19% contraction in 2023. It is predicted that there will be a 13% increase in PE deal volume in 2024, which would still leave deal activity about 8% below the 2022 level and 18% below the 2021 peak. While the shortfall relative to recent peaks will be notable, the more important development is that PE deal volume growth is likely to surpass its pre-pandemic pace next year. Between 2010 and 2019, PE deal volume grew at a 9% compounded annual growth rate (CAGR).

The journey of M&A activity in recent years has been remarkable, with periods of prosperity and uncertainty. Economic indicators, policy decisions, and market sentiments all play a significant role in shaping the landscape of dealmaking. Although challenges may arise, businesses have shown resilience and adaptability, using proactive strategies and collaborative approaches to pave the way for future growth. With optimism for a gradual recovery on the horizon, we should embrace the lessons learned and the opportunities that lie ahead. Agility, foresight, and a willingness to embrace change will be the keys to success in the fast-paced world of dealmaking.

Written by Brigitte Grava

5 March 2024

 

Versailles Group, Ltd.

Versailles Group is a 37-year-old boutique investment bank that specializes in international mergers, acquisitions, and divestitures. Versailles Group’s skill, flexibility, and experience have enabled it to successfully close M&A transactions for companies with revenues greater than US$2 million. Versailles Group has closed transactions in all economic environments, literally around the world.

Versailles Group provides clients with both buy-side and sell-side M&A services and has been completing cross-border transactions since its founding in 1987. 

More information on Versailles Group, Ltd. can be found at www.versaillesgroup.com.

For additional information, please contact

Donald Grava

Founder and President - Versailles Group, Ltd.

+617-449-3325