Planning Your Exit Strategy

Many entrepreneurs don’t include their exit strategy in their business plan, while others don’t consider changes they need to make to the strategy they already have in place. Planning your exit from your company well before any sale or M&A deal can have huge benefits for you and everybody in your organization down the line. It can even help make the eventual sale of your business go more smoothly.  Get the details in our discussion with Mr. Bryan Graiff, member-in-charge of the transaction advisory in the litigation support group at Brown Smith Wallace LLC, in St. Louis.

Questions Answered For You


The sooner you make the decision that an exit strategy is the goal and that you can start planning, the better.

- Bryan A. Graiff

Key Takeaways

  • Going through an exit is probably going to be the largest single liquidity event that a business owner is ever going to go through.
  • You definitely want your accountant, whether it's an internal or an external accountant, to understand and be involved in the process because they're the gatekeeper of all the financial information.
  • The sooner you make the decision that an exit strategy is the goal and that you can start planning, the better. 
  • Having good quality financial information is not going to maximize the value of your business but if you don't have good quality financial information, it's going to cause a lot of issues with the buyer who comes in to try to figure out the purchase price that they're going to buy your business for. 
  • The key thing is to start planning early and get aligned with the right trusted business advisers who can help you through this process and in the end, it will be well worth it for the time and the effort you put in the planning and preparing for your exit strategy.

Read Full Interview


Jeff: Welcome to the Morgan & Westfield podcast. I'm Jeff Allen. If you're selling or buying a business or just interested in this subject, this is the place to be. Our mission as always is to educate and inform you with the help of some of the most credible, highly regarded experts in the industry of transacting businesses so, you'll be better equipped to make some very important decisions when the time comes to sell your business or to buy one.
 

On this edition, we're going to address the questions that many business owners will eventually have to ask themselves, and get answers to when planning the future sale of their business or of your business. I'm talking about your exit strategy. Now you've heard us talked before about the need to have a buy-sell agreement in place well ahead of time, and that's particularly if you have shareholders or a co-owner. Well today we're going to talk about some of the most important things that you need to consider in order to put yourself in the best financial position possible when thinking ahead about selling your business when the time comes.

And to do that, I'm joined by Bryan Graiff. He is member-in-charge of the transaction advisory in the litigation support group at Brown Smith Wallace LLC. He has more than 20 years of diverse financial and operational C-Level experience in public and private companies. His financial and operational services expertise ranges across various industries, such as public accounting, financial services, aerospace, consumer products, chemical manufacturing, professional manpower services and multi-channel healthcare retail and the list goes on and on. Bryan has been involved in reorganizations, acquisitions, divestitures and restructurings for his entire career and provides diverse value added service to every client.

Bryan, it certainly is good to have you here on the Morgan & Westfield podcast. Thanks so much for taking the time to join us.

Bryan: Thanks, Jeff. Glad to be here.

 

Jeff: Bryan, there is a lot to know and there's a lot to understand. We can't pretend here that we're going to be able to answer every question and necessarily address every concern. But really, I think that you'll agree that for business owners, it really is important to make every consideration in advance, and particularly when it comes to eventually leaving or selling your business and moving on, retiring and so forth because that day will come. What is the first thing that a business owner should do to ensure a successful exit when it's time to exit?

Bryan: Well, Jeff, the first thing is really to start planning in advance to prepare for their exit strategy. Going through an exit is probably going to be the largest single liquidity event that a business owner is ever going to go through. And, where I like to start advising my clients is to have what's called a business valuation or appraisal done, and I hate to compare it to a similar process of selling your house, but is somebody just came and knock on your door and say, "I want to buy your house for x dollars", it will raise your interest, but how do you know that's the market value for your house?

Usually, you're going to have an appraisal done by a broker when you go through the process to understand how much it's worth and that's very similar to what I would recommend a business owner to do with their business --- is hire a firm to come in and do a business appraisal, it gives them a good idea of how much their business is worth. Now what that also does is when we do a business valuation, we identify value adders and value eroders - the key things that drive up the value of the business when we're doing the valuation or key things that are causing the business to not be as valued as high. Those are the things that you could start planning for the future, to try to maximize the value of your business to a potential buyer.

The first thing is really to start planning in advance to prepare for their exit strategy.

Jeff: Bryan, what if I'm not prepared to sell my business yet? I'm still looking maybe 5 or 10 years down the line. I mean, is there a need to have a business valuation now or when should I get that done?

Bryan: Well, I still advise clients to start with that. A business valuation also can help for estate planning purposes and we'll get to that point as well, is that a lot of times you need to be preparing for the past consequences when going through a sale. Like I said, a good business valuation will identify the things that are causing the business to not be being valued as high which could be things such customer concentration, vendor concentration issues, just leadership team challenges, things that could take three to five years to improve and put into a path to increase, to maximize the value of the business. There's also value drivers that we could help identify. These are the things that buyers are going to really put a lot of value in and you want more of those; you want to keep growing those things. So, it could really serve as a road map towards the future to help you maximize the value in your business.

 

Jeff: How long does it take a company such as yours, Bryan, or any company that is out there, typically speaking, on average to take and work with a business owner to go through the valuation process? I mean, if I'm someone who is anxious to get out, maybe I've just woke up one day and I thought, "You know, this just isn't any fun for me anymore and I'm ready to move forward". Maybe I'm of retirement age and I'm fortunate enough to have made a lot of money and I want to retire early. How long does the process take to put this together?

Bryan: There are so many firms out there that can specialize in valuations and I'm sure some can tell that they can do it in a couple of days, others would tell you it’s a month. To do a real good valuation and dig in to the data and help you really prepare for the future, you're looking at probably a two-week to a month process and a lot of that is all dependent on the quality of the information that we receive and the access to that information and to discussions with you as the business owner and if you have a team - accounting team, sales team - just talking to the leadership about keeping what they're doing that impact the financial results of the company.

 

Jeff: Let's pretend for a second, Bryan that someone had a business valuation done in, oh say maybe, 2009-2010. Right there where [when] the economy was starting to really bottom out --- 2010, even 2011. Should they go back to a company to have it revalued or what should they do?

Bryan: Jeff, if the company hasn't had a valuation since 2009, the value could have significantly changed now that the economy has improved. We actually have companies that come to us every year to have a new valuation updated or done because it serves as a benchmark, especially to somebody who has a good formal exit plan that they've developed, they want to see how they're doing against that exit plan to see if they're improving or if they're going backwards. So, we help them go through and compare how they were this year versus last year. There's so many advantages to having that valuation performed on a regular basis from an annual basis to maybe at least every two years.

There's so many advantages to having that valuation performed on a regular basis from an annual basis to maybe at least every two years.

Jeff: You're listening to the Morgan & Westfield podcast. My name is Jeff Allen and my guest today is Bryan Graiff. He's member-in-charge of the transaction advisory and litigation support group at Brown Smith Wallace LLC, and we're talking about planning for your exit strategy, planning your exit and the things that you need to know to kind of plan ahead. It's always important to look forward and, particularly as a business owner, you want to be able to plan to find a way to meet each one of these mileposts or maybe yardsticks that you have in mind set out for your business, your goals and to pick the right time as best you can in order to put yourself in the best financial position possible.

You know Bryan, we've already talked about the importance of business valuation and we've talked about obviously how important it is to stay on top of that by revaluing your business on a regular basis, perhaps every year if necessary. What are the next steps if I decide to sell my business? I've got a time frame in mind, what do I do next? What should I plan?

Bryan: Some of the key things that sometimes aren’t looked at until the end is tax planning. From both on a state standpoint and for your own corporation and what the ramifications and cost could be if your company hasn't been structured properly for an exit strategy. The fact that they're definitely one area so you're looking at . . . but starting to look at those, the key things that can improve the value of your business or things that are causing the value of your business to not be maximized, are the key areas that I would focus on and put together an improvement plan with your end result as selling or have it a liquidity event out into the future.

Some of the key things that sometimes aren’t looked at until the end is tax planning.

Jeff: What can I do or what can you do, Bryan, to help me improve the value of my business before selling?

Bryan: I'll just speak to five key things that are very easy to remember. I won't go into too much detail. I call them the Three Qs and then External and Internal.

 

Jeff: Okay.

Bryan: The first Q would be the quality of your financial information. I'd like to say the good quality financial information won't necessarily increase the value of your business, but if you're financial information is in poor quality or there's a lot of gaps, you don't have a good detail financials that you can provide a buyer, it can definitely cause your business to not be maximized because a buyer coming in is going to want to do due diligence. If they don't have good quality financials, it’s just going to raise a lot of questions and concerns.

The other Q, the second Q, would be your quality of your operations. Is your factory lean, clean, and efficient? Is your equipment modernized and in good working condition? Are your computer systems up-to-date? All the things that run your business, you know, how good the quality are those? Could the business owner just come in and assume that business or are there a lot of upgrade costs that they would have to make?

The third Q is the quality of the earnings. Are your sales growing? Are your margins improving? Is there anything funny in the numbers that the buyer's going to raise an eyebrow over if they come in to perform due diligence? So, they’re looking at the earnings and your sales to put together a valuation when they come in to buy.

Then, the internal things that are within your control and the external things within your control. We'll start with the external first --- the quality of your customers and your vendors. Do you have one customer that pays slowly and your competitors are nipping at their heels trying to get their business? Do your customers pay on time or do they pay in 90 days? Do you have lots of quality customers that pay on time? Those are all things that are within your control that you can work towards improving. Same with vendors. Do you have only a few vendors and if a major storm hits will that disrupt their shipments to you? Things towards your customers and vendors are issues that a buyer is going to be very concerned about when they look at your business.

Finally, the internal questions. Are you the brand? Do you do everything as the business owner? Are you the sales leader? Are you the finance person? Are you the purchasing agent? If you walk away from the business, is that going to erode the value? If you have a strong leadership team that allows you to not be that brand and not be the business, if you have those leaders under an employment agreement with a non-compete covenant in there to where they can't just go if they're not happy with the new buyer coming in and go work for a competitor? What are the things you're doing with your employees to let a buyer see a value? A lot of times, as a smaller business owners, too, you might have family members that are on the payroll that may not be doing anything. So, those are things you got to be looking at. Some are tough decisions but you might have to make those. Those are things from an internal standpoint of view to look at, too, that will help you up.

... they’re looking at the earnings and your sales to put together a valuation when they come in to buy.

Jeff: Bryan, I know that you've worked with various sizes of businesses, various industries and there's probably not a lot that you haven't seen. Of the things that you talked about, some of those internal things, the considerations that businesses need to be aware of, what seems to be the most common problem or common issue that you have found when you're working with business owners to help them prepare for their exit? Anything that you'd be willing to share?

Bryan: I think going back to that owner is the brand, especially in a smaller business, that becomes a big challenge if the customers are only buying from you because of you. A buyer may come in, do their due diligence, they're going to pick up on those types of things and you really do have to have a plan in place to where you have other leadership on your team that a buyer knows that if they buy that company and you want to retire on the beach and walk away, that the business isn't going to go with you.

So, that's probably one of the key things but there's just a host of other issues and like you said, I've been on the other side of desk and seen some acquisitions, and I sold companies and had bought companies and now, I help my clients on both sides with buying and selling and so, I kind of see both sides of the transaction. With my firm and the things we do, I think we add a lot of value from that perspective because we've had so many examples of good things and bad things that can cause the purchase price to be impacted.

 

Jeff: What is one of the ways, Bryan, that you can share with us for a business owner to help them increase their profitability? I know it's different for everyone, we've heard the term "lean" and the process of lean manufacturing for example, and we can kind of assume what that means. That means basically being able to control costs, it means continuous improvement in order to lower costs so that you’re maximizing profitability. But are there any particular areas that you can share that business owners really need to be cognizant of, as maybe first places they can look to cut some of these costs and maximize their profitability.

Bryan: I would say when you're getting into lean manufacturing, or lean improvement, there's a lot involved in that and they can be some pretty excessive consulting projects to make those improvements. But, yes, you know, there are some simple areas you might be able to look at like low-hanging fruit, or maybe just some of production equipment is outdated and just modernizing some of your production equipment, although that would be an investment and a cost to you, but there may be some improvement costs and margins down the road from just being able to automate some things and upgrade the technology in your company.

Other low hanging fruit areas is really do an analysis of your customers. A lot of times over the years, you have high-demanding customers that the margins are not as optimized as you like and then, there may be ways to go back and try to improve the margins that you're getting from existing customers or you might have to rationalize some of your lower margin customers to focus on growing your A-list customers. So, there's a number of low hanging fruit things that you can put in place to help prepare a business to go through a sale process and maximize their value.

 

Jeff: Obviously, most businesses that are concerned with being as prepared as possible are going to have people in place that help them with their books. They're not going to take care of the . . . business owners are not going to do all these stuff themselves. Typically speaking, how involved should my accountant be in the exit planning process?

Bryan: You definitely want your accountant, whether it's an internal or an external accountant, to understand and be involved in the process because they're the gatekeeper of all the financial information and as I shared previously, having good quality financial information will really help improve the process of going through an exit because the buyer is going to do due diligence. They're going to come in, they want to look at the numbers and so, you want your accountant as a partner in this process to work through it. If they're an external accountant and he offers your accounting, or if you have a review or an audit done, you want them involved and engaged to help you through this process because if they're more aware that there's an exit strategy or goal out there, they can be doing the things to help make sure the books are cleaned up, they're in good shape, there's no frivolous costs being allowed to happen, they're going to help you work towards keeping those financials as clean and lean as possible as well which makes it all better for everybody going through the process.

 

Jeff: A big reason that many owners get out is they have done an analysis on their business, they've been falling behind perhaps, the economy has not been good, their competition has won over market share, for whatever reason so they'll see that, "Okay, I'm going to have to restructure my company and the way that I operate in order to become profitable again just to generate revenue" perhaps even or "I'm going to have to do something even worse and that's potentially file bankruptcy here because I just can't continue".

At that point, there are a host of questions that can come up, I would imagine, Bryan, with respect to selling a business and being able to get out of it as unscathed as possible. What if a company is in need of doing all of those things or some of those things - restructuring, on the verge of bankruptcy - as they're planning their exit strategy or if they have to now plan their exit strategy, maybe move that process up a little bit because they don't know that they can even continue?

Bryan: Again, the sooner you make the decision that an exit strategy is the goal and that you can start planning, the better. If your company is struggling, like what we've spoke about earlier, there are some low hanging fruit issues that can help . . . that can be done fairly quickly to try to improve the cause situation. I have been involved in companies that had to go through restructuring and then involved in bankruptcy situations. Being open and honest about the situation is the first step. And if you need a good banking partner to work through this with you, there's investment bankers and brokers out there that can help still try to maximize the value of this business to try to avoid having to go through a bankruptcy transaction. There's always buyers out there who are looking for distressed opportunities and yet as a seller, you're still in a good position where you don't have to come to the demands and sell your business at a total discount if you plan and prepare and have the right advisers in place to help you go through the process.

 

Jeff: Bryan, are you able to give us any kind of an estimate? We understand that every company is a little bit different, every situation is unique, but is there kind of a range of anticipated fees for someone who's interested in selling a business that is . . . maybe they have a five-million dollar company?

Bryan: For transaction advisory work, like the type we do to help a company go through an exit process, most firms are going to find charges are based on hour and a rate process. There's no transaction that's exactly alike. You don't know what you're going to get into with the transaction as you get into it so, it really costs to give a firm estimate on how much the fees might cost but I think you always have to keep in mind the end goal to maximize the value of your business. And the right advisers from not just an accounting and transaction advisory standpoint, but from a legal, tax, state, planning and investment bankers/brokers' standpoint, their fees are usually worth their weight in gold if they do a good job and they help you maximize the value and then it's a win-win for everybody.

You don't know what you're going to get into with the transaction as you get into it so, it really costs to give a firm estimate on how much the fees might cost but I think you always have to keep in mind the end goal to maximize the value of your business.

Jeff: Jumping ahead . . . by the way, let me go ahead and reset. In case you're listening over someone shoulder or you found a stray iPad somewhere [laughter], you're listening to the Morgan & Westfield podcast series, and my guest is Bryan Graiff. Bryan is working with a company called Brown Smith Wallace LLC. He's the member-in-charge of the transaction advisory and litigation support group there and I hope that you've been enjoying the program as much as I have in talking a little bit today about planning your exit strategy and about getting out and selling your business, the things that you need to think about ahead of time. And these could be well ahead of time --- 5, 10, 15 years; The planning can never start too soon so, obviously you don't want to wait until it's too late.

Bryan, thinking ahead a little bit, are there certain areas that I need to really focus on when it comes to anticipating what a buyer's adviser may look at in terms of doing his due diligence for a potential buyer down the line, when considering purchasing my business? Are there some areas that I need to look at, focus on, that I need to make sure that are absolutely cleaned up spick-and-span and show as well as possible in terms of performance? Maybe these are internal variables, anything at all that you can share about that?

Bryan: Sure, Jeff. We talked a lot about the quality of the financial information, and again, having good quality financial information is not going to maximize the value of your business but definitely, if you don't have good quality financial information, it's going to cause a lot of issues with the buyer who comes in to try to figure out the purchase price that they're going to buy your business for. So, you really have to have your financial statements in really good shape.

Other areas that a buy-side due diligence is going to grill into:

They're going to look at your IT system. Is it updated? Is it operating effectively? Do you have your certifications in place? They're going to look into employee issues. Basically, when they're buying a business, a lot of the assets they're buying are going to be the employees and they're going to be wanting to do background checks and make sure that the employees that are currently doing work for you, are going to go forward with the company so that they're under employment, the key employees are under employment agreements.

If it's a manufacturing plant or a facility that they're buying, there could be environmental issues that they have to dig into. From a business perspective of the other things they would want to understand are the customer relationships, the vendor relationships, the costs and margins of those vendor relationships and with those customers - who are your top customers, your top vendors?

Back to the infrastructure of the company, are the fixed assets, the equipment, all the assets needed to run the business, are they up-to-date or are they going to need a lot of investment to move forward? Those are just few of the key things they're looking at. In the end, they also see some synergy opportunities and see your business as a compliment to them or your sales team is a strong sales team and they have a great purchasing team. There's some synergy. Those are things that can really symmetrically maximize the value of your business as well.

 

Jeff: Final thoughts, Bryan Graiff … Just something that you think that people need to take away from our conversation today. If you're in an elevator with someone and you're going up to the 20th floor and you know that you have about 20 seconds to just give them some parting advice on what they need to think about if the idea of selling their business has come up, what would you tell them?

Bryan: I've been asked before "What's the magic bullet or what's the one secret you would tell somebody to help maximize their value and have a successful sale?"

There really is no magic tool out there. Every transaction is different. Every process you go through to sell a business is different and has its different challenges. But the key thing is to start planning early and get aligned with the right trusted business advisers who can help you through this process and in the end, it will be well worth it for the time and the effort you put in the planning and preparing for your exit strategy.

There really is no magic tool out there. Every transaction is different. Every process you go through to sell a business is different and has its different challenges.

Jeff: Well, Bryan, that's great advice. If anyone would like to talk with you, they've got specific questions for you, maybe based on hearing this podcast today, where can they reach you? Who can they call? What number, what website, give us the information.

Bryan: Like you said to your listeners, I'm a partner-in-charge of our transaction practice at Brown Smith Wallace LLC. We are headquartered is in St. Louis, Missouri. My phone number is 314-983-1390 and my email address is bgraiff@bswllc.com. And they can all also go to our website at bswllc.com. There's a link to my information under transactions.

 

Jeff: There you go. Bryan, it's really been a good time. Thank you so much for taking time out of your busy schedule for joining us and hopefully, we can have you back on the program again soon.

Bryan: Okay. Thanks, Jeff! It's a pleasure being with you and I hope your listeners will enjoy our podcast today.

 

Jeff: Thank you again to Bryan Graiff, member-in-charge of the transaction advisory and litigation support group at Brown Smith Wallace LLC for joining us today on the Morgan & Westfield podcast presented by Morgan & Westfielda nationwide leader in business sales and appraisals. I certainly hoped that you enjoyed our time together.

If you'd like more information about buying or selling a business, call Morgan & Westfield at 888-693-7834 or you can visit morganandwestfield.com. Until next time! My name is Jeff Allen and I'll look forward to talking to you again.