Common Mistakes Made Planning the Exit
During the life cycle of a business there are many important stages. As discussed in former The Ambulatory M&A Advisor articles, the start-up and growth stages are key aspects to a business’ life cycle because those are the areas where the money is made for an appealing sales price when the time comes to exit.
The exit of a business owner is the concluding chapter of a business’ original lifetime and can be the beginning of a new story for the acquiring powers that be. A proper exit strategy needs to be in place in order for an exit to both run smoothly and efficiently for both sides of the party. The Ambulatory M&A Advisor discusses some of the most common mistakes that are made during an exit, how they can be remedied and what types of impact these mistakes may have on a business that is either poised or in the middle of an exit. Some of the issues discussed include, lack of an advisory board, exiting too late in a market, not exploring other liquidity options, being unaware of a business’ actual worth, and much more.
Neil Ayervais, Shareholder, Attorney with Alperstein and Covell PC explains that mistakes are always made when trying to plan ahead, oftentimes, years in advance. They are always made simply because one just cannot plan the future. Ayervais says that so much of the subject is generalized because exit strategies will vary dramatically from industry to industry, business to business.
“This all depends on how regulated the business may be, how volatile the business may be, the nature of competition, how concentrated and diverse the nature of the business may be. All of those factors have to be considered when you are planning, and as you are looking at the current status of things trying to predict years down the road, it becomes difficult and you are always going to make mistakes. It is a dynamic situation that you will have to address as you go along and understand that the nature of your business changes, your industry changes, all of the factors that weigh on selling a business will change during the course of your business,” Ayervais says.
Vanita Spaulding, managing director with Cogent Valuation says that finding mistakes during the planning process of an exit presumes that somebody is actually planning.
“The biggest mistake is waiting too long. It truly is the biggest mistake. People wait until they are sick or wait until they are looking at a bad year ahead. You should plan an exit the year after that when you have fixed the issues and are now moving forward,” Spaulding says.
She adds that waiting would be even better to sell after the recovery year because then it looks like the business is in a growth trajectory instead of a decline.
“If you wait too long to do planning and wait until you want to sell your company in six months, you don’t have enough time to accomplish your plan. If you have waited that long, then you really don’t know what your business value is or how to structure a deal because you have not met with the proper advisors. If you have waited too long then you don’t have time to make changes,” She says.
Ayervais says that if an owner is going to sell their business, then valuation is the most critical component that cannot be mishandled.
“When you look at all of the aspects of valuation there are numbers of them that you can’t control. If you are going to use a multiplier of earnings, which for most service business is going to be the principal measure of value, that is something that you can’t control,” he says.
“However, the things that you can control are things like how long term the contracts that you are subject to are, your debt load, your employee contracting, whether it is at-will or termed contracts…all of the kinds of things that go to to the bottom line, if you wait too long to do that, it is obviously going to impact your business strategy.”
Ayervais adds that how a business is structured is important.
“Do you have minority/majority owners who have control over those kinds of decisions? Are there tag along and drag along rights? One of those things that you have to consider when you are planning all of this is how you structure your entity. Your governing documents may lock you into positions that make it difficult to negotiate a sale. Those are the kinds of things that you can end up getting stuck with if you don’t plan for them,” he says.
Not Hiring an Advisory Board
Alexander Davie, Co-Founder and Member of Riggs Davie PLC says that regarding advisors, using both legal and financial counsel that specialize in the industry and the exit of a business are key.
For most physician practices in exit planning, the lawyers are there to ensure that the company’s legal matters and record keeping are being handled correctly, Davie says.
“That can be in any number of areas that come into play. It can be simple things like keeping corporate minutes and ensuring that the company’s formation documents are in proper form. This is especially important where you have a corporation (rather than an LLC) as there are a lot of formalities needs to be kept up. In addition, there are other basic things, like having written contracts in place and making sure you get all the required signatures,” Davie says.
“Then there are higher level issues like regulatory compliance. The biggest items that physician practices have to deal with are usually healthcare regulatory issues.”
Ayervais says it is hard to be objective about one’s own business, so it is important to get the right advice. It is important to get the right tax advice, have a valuator and an independent valuation, and it is important to have individuals that can advise who have been through this with other clients.
“Ask yourself what the pitfalls are, things to look for, and what you can give up. The most important thing that I do in my role is helping the client prioritize their goals. You are never going to get everything you want in any deal, so what you have to decide is what is most important and least important,” Ayervais says.
Spaulding says that one mistake she sees sellers making is hoping that they can hire one consultant and that one consultant can provide all of the services from legal, to M&A, to valuation.
“If you can find one person who is a specialist in all of those areas, then I want to know who that is. There are lawyers that specifically focus on M&A; they are really good at their jobs and can get the project done because everything is in their head rather than having to research. The same goes for valuation; somebody with 30 years of experience in providing business valuation knows what needs to be done,” Spaulding says.
Misunderstanding Business Worth and Mismanaging Post- Sale Goals
Spaulding says the biggest problem of not knowing a business’ worth is either selling for too little not knowing the value.
“You might accept a very low value, and also could be passing up on a really good offer. In your mind, the business is worth more, and you don’t really know if you haven’t had an independent valuation expert to tell you what the value is right now,” Spaulding says.
“I think you should hire a team at least a year before the exit, and then the team provides preliminary analysis for the seller prior to the sale. If someone hired me, an M&A attorney and an M&A tax specialist a year before the desired sale, I would say to them that I would like to perform a very preliminary valuations analysis for the value now and then give them a short list of the things that I think they might do to change the business and potentially improve the value of the business throughout the year.”
Ayervais says that all business owners think what they have is worth more than what other people think.
“If you are the seller you are going to view the value of what you have greater than the buyer will. Obviously, some kind of independent advice as to what your business is actually worth is critical because you can’t be objective about your own business,” he says.
As far as post-exit goals, Ayervais says this area is all personal, it depends on the extent to which the owner desires to be involved post-transaction, if at all. It depends on how the income stream from the sale is to be utilized or structured.
“Is this the kind of thing where you would want to have a consulting agreement and remain involved? Is it the kind of thing where you want to remain involved in some other capacity? Do you want the proceeds all at once or over some period of years? It is all very personal and that is just one of the questions that sellers have to decide,” he says.
Spaulding says that in the valuation world, when discussing post exit-goals there are wild guesses and sophisticated wild guesses in the valuations community.
“A wild guess is when a business owner says that their business is easily worth 5 million dollars, and really has no idea, but is basing it off of a deal his friend got in a completely different industry.
Sophisticated guessing is determining various things like paying off a house, paying a mortgage, needing so much money in the bank for retirement post-sale…these are the things that a seller needs to retire, but it has nothing to do with the value of the business,” Spaulding says.
If you have an interest in learning more about the subject matter covered in this article, the M&A process or desire to discuss your current situation, please contact Blayne Rush, Investment Banker at 469-385-7792 or Blayne@AmbulatoryAlliances.com.