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How Entrepreneurs Benefit From Corporate Exit Planning

The literature on selling your business repeatedly advocates corporate exit planning which entails taking specific steps to prepare your business for sale. The objective of these actions is to increase the value of your company as well as make it “easier” for the new owners to be successful. Professionals such as investment bankers, accountants, and corporate lawyers regularly advise entrepreneurs to take such actions. 

According to P.J. DiNuzzo, founder and Lead Consultant of DiNuzzo Middle-Market Family Office and author of the Wall Street Journal bestselling book, The DiNuzzo Middle-Market Family Office™ Breakthrough: Creating Strategic Tax, Risk Cash-Flow and Lifestyle Options for Successful Privately-Held Business Owners and Affluent Families, “In our study of 269 affluent former-entrepreneurs, nearly 70% of them reported that they engaged in corporate exit planning. What is very telling is that among those affluent former entrepreneurs who engaged in corporate exit planning, a significantly larger number of them were highly satisfied compared to those who were satisfied—74% compared to 26%. More precisely, three-quarters of the affluent former entrepreneurs who engaged in corporate exit planning were highly satisfied with the price and terms of the sales.” 

Based on a thematic analysis of open-ended survey questions, the rationale for only being satisfied was due to:

  • Pressure to sell: Whatever the source of the pressure such as poor health, the sale being pushed by equity partners, or some other reason, the feeling is that the companies went for a lower price or that the terms were not as good as they could have been. 
  • Relying on less capable professionals: Very often, the different professionals that entrepreneurs rely on are referred by other professionals. While this is often a very effective way to put together a high-quality team, not taking an active role in due diligence can result in working with subpar advisors.

“About a third of the affluent former entrepreneurs who did not engage in corporate exit planning was highly satisfied with the price and terms of the sale—37% compared to 63%,” says DiNuzzo. “Very often, the companies of these affluent former entrepreneurs sold for more than they expected. Still, they might have garnered an even higher price if the affluent former entrepreneurs engaged in corporate exit planning.”

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Bear in mind, that none of the affluent former entrepreneurs said they were dissatisfied, which makes sense. If the affluent entrepreneurs were not satisfied, then the deals for their business would have fallen through.

Key Components Of Corporate Exit Planning

According to Anthony Glomski, principal and founder of AG Asset Advisory Family Office and author of Liquidity & You: A Guide for Tech and Business Entrepreneurs Approaching an Exit. “Corporate exit planning can be thought of as a strategic guide for selling your business. It starts with your objectives and addresses the sales process taking into consideration your overall goals and caveats you might have. It is usually a good idea to start the planning as soon as you believe a sale is a real possibility.”

Depending on the nature of your business, it might take months or even years to make sure all the pieces are in place. For example, many companies are strongly dependent on key employees to continue to make the business successful. If this is true in your situation, what is required is that you either lock in these employees or make them.

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There are a number of elements to a solid corporate exit plan including:

Identifying drivers of business value: These are the aspects of your business that are attractive to potential buyers. They become important in marketing the company and negotiating with prospective buyers. 

  • Enhancing profits: Many entrepreneurs can look to take a variety of steps, such as eliminating “bad” customers and refining operations, thereby increasing gross profit margins.
  • Addressing the cost of funds: The right loan covenants, for example, can make a significant difference when selling a company. The overall intent is to maximize the working capital arrangements.
  • Improving the balance sheet: From doing a more effective job with cash management and accounts receivables to expunging non-performing assets and personnel, a company can effectively better its financials.
  • Leveraging value enhancement possibilities: You are well-advised to take actions from fixing management problems to better locking in customers to eliminating any personal expenses that are being run through the company that can increase the company’s valuation. 
  • Analyzing the exit options: There are a number of different potential buyers. Examples include senior management, competitors and going public. There are also strategic versus financial buyers. The possibilities and implications of each exit option should be evaluated. 
  • Effectively marketing the company: Marketing can often play a major role in selling a business. The ability to identify a larger number of interested buyers, for example, can prove very beneficial. 
  • Producing a solid negotiating strategy: Often, with all the numbers in hand, the bargaining capabilities of you and your team of professionals can result in a better deal—whether it is a higher price, better terms, or both.

“Corporate exit planning also involves organizing a company for sale. It includes efforts that will address any lingering operational or procedural problems that can impact profits, making sure that proper infrastructure is in place, along with the appropriate documentation, among other things,” says Vince Annable, CEO and founder of VFO Advisory Group and co-author of Your High-Performing Virtual Family Office: Maximizing Your Financial and Personal Lives, “There are a variety of actions entrepreneurs can take to prepare their companies in order to command the best price. Unfortunately, many entrepreneurs have not taken any of these steps to strengthen and secure their financial future.”

Russ Alan Prince is the executive director of Private Wealth magazine and chief content officer for High-Net-Worth Genius. He consults with family offices, the wealthy, fast-tracking entrepreneurs, and select professionals.

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