Exit strategy: First steps to selling your business & planning your future

exit-1722888_640Editor’s Note: This article first appeared in PNC Insights for Women in Business magazine. I came across while perusing an issue at my local branch of PNC and thought it would interest my readers.I want to thank PNC for allowing me to share it with you.

No matter what stage of its life your business is in, it’s never too early or too late to start planning its sale — and your future. There is no scientific formula for succession planning; every owner will need to assess and determine what exit strategy is best for her company. But there are common steps you can take to create a succession plan that works for you, your family and your business. It begins with assembling a team of experts, then understanding your goals, the state of your business and, finally, whether the economic climate is right for transition.

Gather your team
Unless you’re a serial entrepreneur, selling your business is likely a once-in-a-lifetime event. And it can be complex. It’s wise to surround yourself with experienced experts such as an accountant, an attorney and a personal wealth advisor. Depending on the size of your company, you may also wish to work with an investment banker who specializes in mergers and acquisitions (M&A).

“It is best for business owners to begin working with M&A experts early as they begin to assess their options and develop a sale strategy,” says William Watkins, managing director at Cleveland-based investment bank Harris Williams & Co., a leading middle market investment bank focused on M&A. “Just as companies plan carefully before marketing a new product or entering a new market, they should also be intentional about succession planning.”

Georgiana Riley sold her company, TIGG Corporation, an Oakdale, Pa.–based manufacturer of air- and water-purification systems, in late 2014. She found that handing over day-to-day details of the sale to her attorney and investment banker allowed her to focus on the ongoing needs of the company.

“We talked every day, but I realized that I was too emotionally involved to be fully effective,” Riley recalls. “It was so good to have them at the front line, keeping me informed and asking me how I wanted things to be handled.”

Set your goals
As Riley learned, the emotional component of selling a business can be major. Your own goals for the transition — followed closely by those of your family, partners and other stakeholders — are arguably the most important considerations when it comes to succession planning. But don’t think you’re alone in figuring everything out; your professional team can help you determine the best course of action.

“The sale of a business can take a variety of forms,” Watkins points out. “It can range from an employee stock ownership plan or a management buyout all the way to the other end of the spectrum, where a business is being sold to a strategic buyer, or to a financial investor, such as a private equity group. We spend a lot of time with business owners to help them think through strategies around timing, valuation and the right process to maximize the event for the stakeholders.”

And what if you’re related to said stakeholders? Selling a family-run business has its own complications, but careful planning can help overcome the obstacles. Often, families must contend with the likelihood that not every child will want to become actively involved in the business. In those cases, it can take some creativity — and plenty of communication — to make sure that an estate is treated equitably.

“You may want to set up two classes of stock — voting and nonvoting — and allocate them depending on an heir’s participation in the business,” notes Jennifer Immel, director of wealth planning in Florida for PNC Wealth Management. Life insurance offers another option to provide for children who don’t wish to participate in the management of a family firm.

Another consideration should be the impact of the sale on your personal finances. “One of the first things I ask business owners is whether they have sufficient assets saved for retirement, and whether they’ll need a continuing income stream from that business,” Immel explains. “A cash-flow analysis of different succession scenarios can help owners identify an exit strategy that best meets their future income requirements.”

Know how (much) to let go
The plain truth is that some business owners simply aren’t ready to face issues that can seem far off. In particular, some entrepreneurs are flat-out wary of the traditional notion of retirement.

“One of the things you hear a lot from women who own their own businesses is, ‘If I sell my company, what am I going to do next?’” notes Yvonne Campos, who as chair of two Women Presidents’ Organization chapters helps female-owned companies thrive. “It can be very difficult for entrepreneurs to get to the point where they are emotionally prepared and ready to sell.”

Campos sold her Pittsburgh-based research strategy company, Campos Inc., in late 2013. As part of the sale, she chose to remain active in the business, not only to provide the value of her experience and expertise in business development to the new owner, but also to continue doing what she enjoys. Although Campos sold her entire equity interest in the firm, she wasn’t ready to entirely let go.

Riley, on the other hand, chose to exit her company completely, yet she still had specific criteria for a potential buyer. “I was looking to sell to a company that would be able to complement the strengths of the organization I built, one that had similar values and culture,” she recalls. “I was very concerned about my employees’ being able to stay on and continue in the business. Those were the main drivers.”

Riley was also looking for a strategic buyer that could realize the growth potential she knew TIGG had. For example, the eventual purchaser, Spencer Turbine, had the sales infrastructure needed to penetrate the municipal drinking-water market, which TIGG was just entering. “On our own, it would have taken years for us to build market share in that segment,” Riley points out.

Prepare your company
One of the first questions business owners often have when they contemplate a sale is, “How much can I get?” Price is determined by a number of factors, including assets, past and current performance, and, perhaps most important, ongoing potential. In other words, the same drivers behind your company’s growth also help determine its value to a buyer.

“Growth rate is crucial to determining value,” Watkins says, “so when preparing for an exit, you want to be investing in growth strategies.”

Complex transactions such as the sale of a company require due diligence on the part of the buyer, so sellers must be prepared to have every detail of their company scrutinized. Prior to any transaction, review your company’s operations and its balance sheet for anything that might delay a sale or reduce value. That means making sure your books are independently audited and your financials are in good shape. On the legal front, look for any obstacles in the business that could give buyers concern or impact value.

And, of course, your company’s industry and the economic climate in general can influence value. “You have to look at the M&A market itself,” Watkins says. “For example, you could argue that today’s M&A market is as strong as it’s been in many years, but during the financial crisis of 2008 and 2009, it was really hard to maximize the value of a transaction, even for a growing business, just because the financial markets themselves were in such disarray.”

The bottom line? Exiting a business has a number of tightly interwoven components — emotional, financial and economic — that make it a highly complex transaction. But all business owners must consider how their company will carry on without them. So the sooner you begin planning and identifying the team of advisors who will help you, the more likely you are to achieve your personal, professional and financial goals.

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This article was prepared for general information purposes only and are not intended as legal, tax or accounting advice or as recommendations to engage in any specific transaction, including with respect to any securities of PNC, and do not purport to be comprehensive. Under no circumstances should any information contained in this article be used or considered as an offer or a commitment, or a solicitation of an offer or a commitment, to participate in any particular transaction or strategy. Any reliance upon any such information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other advisor regarding your specific situation. Neither PNC Bank nor any other subsidiary of The PNC Financial Services Group, Inc. will be responsible for any consequences of reliance upon any opinion or statement contained here, or any omission. The opinions expressed in this article are not necessarily the opinions of PNC Bank or any of its affiliates, directors, officers or employees.

©2016 The PNC Financial Services Group, Inc. All rights reserved. Member FDIC

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