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What is Your Exit Strategy

exit strategy Dec 01, 2020

One fact that all business owners need to consider is the absolute unavoidable fact that they will leave their business at some future point.  Since that is a fact, then we need to examine the steps that an owner should take to prepare for that eventuality.

One of the principles outlined by Steven Covey in the “The Seven Habits of Highly Effective People,” is, to begin with, the end in mind.  His premise is that as individuals, we should think about the legacy we want to leave behind and then work toward achieving that goal.

The same principle should govern an owner's view of his business.  Ask yourself, What do I want my business to look like when I walk out the door for the last time?  Do I want to leave a thriving business with happy employees, satisfied customers and reap a solid reward for my endeavors?  Or, do I want to leave a smoldering heap of ashes behind that is of no value to anyone?

Begin with the End in Mind

We will discuss several possible exit strategies for an owner.  Some are better than others.  Sadly, some owners make poor choices and reap one of the less desirable results. 

Eventual Sale

The sale to one of the acquisition companies in our marketplace is probably the most common option.  It seems that on a weekly basis, I read news releases where companies such as DEX, Marco or Visual Edge are purchasing dealerships.  There is no reason to think that this trend will slow down. 

If this is your exit strategy, then understanding and improving the factors that create value in your company will pay rich dividends.  The time to start preparing is now, don’t wait until you either want to or have to sell to start making changes.

Sale to Employees – ESOP

While this is not a common option, we have seen examples of this in the industry, and at times it has worked well.  Marco was for many years an ESOP, and the company thrived with this strategy.

Turn it over to Family

  There are important steps to take to ensure the success of this exit strategy.

Make Sure They Want It.

This may seem like an obvious statement.  I worked with a dealer in the past, and the owner passed up opportunities to sell his business because he wanted to leave it to his son. 

The problem was that his son didn’t want the business.  He was much more interested in starting a pizza restaurant.  The result was a business that died a slow death, and the owner received nothing for his years of hard work.

Give Them the Needed Training

For the children to be successful in running the business, they need to understand it from the ground up.  Giving them a title and an office does not provide the experience they need. 

The dealers that put their offspring to work in entry-level positions and let them learn the basics are much more likely to be successful when they earn their leadership role.

Die in Office

Dying in your office is not an exit strategy that most would choose, but it is the result of not choosing another option.  The result is chaos and a business that is of no value to anyone.

Take the Money and Run

I worked for two owners that used this strategy.  I didn’t realize what their plan was while working for them.  They were selling refurbished equipment, getting funded for the entire value of the service contract in advance.  After doing this for about three years, they closed their doors, filed bankruptcy and left behind a disaster for their employees and their customers.

In their case, they had a clear exit strategy in mind.  While the strategy was ethically and legally reprehensible, it was an exit strategy, and it worked to the owner's advantage.

Key Factors in the Value of Your Business

To put real-world information in this article, I consulted with two individuals with experience in this process.  Scott Chatten is an individual that has purchased and sold copier dealerships and currently serves as a partner in a thriving dealership in Texas.  Jim Kahrs is a business consultant who works with dealers on either side of the acquisition process.

Profitability

When I asked about key factors, this is what Jim had to say. The first thing most need to do is look at their business through the eyes of an acquirer.  Too many run the business with the goal of minimizing taxes.  The problem here is that you accomplish this by minimizing profit.  Acquirers look for profitable businesses as they provide the best return on investment.  If a dealer is considering selling he or she should focus on driving profit (even if it means paying a little more taxes now). “

Customer Retention

Jim had this to say about customer retention. “Customer, and particularly contract customer retention is critical.  If an acquirer doesn’t feel confident about retaining the customer base, they will likely walk away from the deal.  Without retaining the vast majority of the customer base, it is impossible to get a return on the investment.  One of the reasons there is so much acquisition activity in the industry today is because acquirers feel confident that they will retain the customer base they purchase. “

Solid Recurring Revenue

Jim made this point about the recurring revenue.  “One very important consideration here is your service agreement.  It needs to be written in a way that supports the retention of the base after a sale of the business.”

Scott made a similar point as well when I asked him what changes he made to build value in his business.  “100% 3rd party leasing with locked service in the deals as much as possible … Locked up profitable reoccurring revenue is the ultimate ROI for the buyers.”

Having the majority of your service contracts included with the lease provides guaranteed recurring revenue for the term of the lease and is extremely important to prospective purchasers.

Reasonable Debt

The debt load of your business will directly reduce the net proceeds of the sale.  An excessively high debt load may also raise questions in the mind of prospective purchasers about the reason for the debt and if something is happening to cause the debt.

Positive Cash Flow

Positive cash flow is critical to the valuation process.  Properly managed profitable businesses generate positive cash flow.   When the cash flow doesn’t correspond, there is usually a cause that will negatively affect the value of the business.

Solid Vendor Relationships

One other factor that is important is how the contract between your company and your vendor is structured.  In some cases, vendors will have clauses in their agreement that gives them the first right of refusal if you choose to sell your business. 

They may also have clauses that give them the right to cancel the agreement if you sell.  Both of these seriously limit the value of your business, and if your contract is structured with either of those clauses then work on fixing that sooner rather than later.

Bob Goldberg, the legal counsel for the BTA, may be able to assist you in this process.  Before signing any new agreements or extensions to existing agreements, I would reach out and have him review those agreements.

Solid Management Team

When a new owner takes control of your business, they do not want to have to hire a new management team.  In many cases, they will want the current owner to stay in place. 

Work now on developing a true management team, not just people with titles, but with a team that can be self-sufficient in running the company in your absence.  This process takes time, effort, and mentoring but will result in your company operating more effectively in the near term and make it more attractive to a potential buyer.

Succession Plan

If your exit strategy includes leaving the company entirely, you need to have someone trained and ready to assume the responsibilities you currently have.  You will want to choose someone from your management team and give them the training needed.

Do not assume that the sales manager is the obvious choice.  In my career, I had the pleasure of working for an owner that had come up through the service side of the business.  He had an astute understanding of the business, was good at both sales and service and was a good leader.

Mistakes to Avoid

When I asked Jim about the biggest mistakes dealers make, he had this to say.  “As stated above, focusing on minimizing profit for tax purposes is one of the biggest mistakes.  Beyond that, I would say too many don’t have a plan.  Ideally, a dealer should be preparing at least three years out for any business sale.  When we work with dealerships that are looking to sell, we often find areas of the business that should be addressed before approaching buyers.  Most of the things that need to be addressed take time.  Trying to do them last minute almost always results in reduced business value.”

I asked Scott what mistakes the previous owner had made that diminished the value of his business.  He replied:  “Not using 3rd party leasing and keeping rental assets on the books. Used copiers offer very little to lenders in the form of collateral for the new buyer.”

I also asked Scott what he should have done differently, and he said: “Focus on core markets and going deeper into existing accounts. I did the second acquisition of a small dealer and added two new sales offices. The money and energy spent on new markets would have been better invested inside the satisfied customer base.

The End Result

 

A well thought out, and executed exit strategy will let you leave the business with a proud feeling and the maximum amount of cash.  It will protect your employees and your customers.  Remember, it only happens if you begin with the end in mind and carefully execute the needed steps. (This article appeared in the December 2018 issue of Office Technology magazine.)

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