Sell Now or Hold and Grow?
THE SITUATION: $49MM revenue, 20-year, well-established manufacturing and distribution company, with significant margin pressure.
Two partners with a significant age difference did not have an exit strategy in place but had received an offer from a buyer to purchase 100% of the business.
When asked, “Why didn’t you take the offer?” their response was, “With only one offer, we didn’t know if the price was at market and if it was enough money to fund our lives. We didn’t understand the terms and we were also worried the buyer wouldn’t take care of our customers and employees who are like family to us– and a few employees are actually family.”
Key Owner Questions
- Will the offer meet our financial goals?
- Is now the right time to sell or should we grow the business and sell later at a higher value?
- What happens to the business if one of the partners becomes incapacitated or dies?
- How do we assess if a buyer is the right cultural fit for us?
OUR APPROACH
Create an actionable and comprehensive Master Exit Plan® that answers all of the above questions and addresses both partners distinct and shared business, financial, and personal goals:
- Valuation: We performed an in-depth quantitative and qualitative analyses to calculate the Enterprise Value of the business in the current mergers and acquisitions market. The valuation uncovered weaknesses that depressed value and marketability. Strengthening and de-risking the company prior to going to market will ensure that upon exit the business will attract multiple buyers at the highest price and best terms to meet the owners’ goals.
- Optimization Plan: The valuation identified opportunities for improvement such as expanding the leadership team and employee base, upgrading technology, and increasing R&D to support the development of new product lines that will expand volume and strengthen margins, etc. A growth strategy was identified with a supporting tactical plan to optimize the business to increase value and marketability of the entity. A significant risk to the business and the owners’ wealth was also identified because they did not have a funded buy-sell agreement in place.
- Post-Ownership Plan: The post-ownership plan identified each owner’s personal goals and financial aspirations based upon the anticipated liquidity when the business is sold. The plan served as a baseline to determine their personal financial needs upon exit which helped establish the exit timeline for each partner.
- Personal Financial Plan: A financial plan was created for the owners. We based the cost of retirement on their post-ownership plan and allocated the owners’ available assets, including the projected net investable proceeds from the sale of the business, to fund the plan. The financial plan provided the owners with the necessary clarity to assess whether selling the business today would meet their goals. The plan also served as a guide in developing a tax mitigation strategy which was incorporated into their wealth management and estate planning.
- Exit Strategy: Based on the valuation and their personal financial plans, the owners opted to hold and grow the company. They are currently executing the optimization plan and will exit via a sale to a third-party when the valuation goal that will fulfill their financial objectives has been met. Due to the age difference in the partners, they will seek a recapitalization structure to meet the older partner’s goal to retire and the younger partner’s desire to continue working with an equity position in the new company post-sale.
- Tax Mitigation and Estate Plan Review: A strategy to minimize taxes on the sale of the business was developed and each partner’s estate plan was updated to include the proper distribution of assets according to their wishes.
Result
The optimization plan to de-risk the company and increase value through revenue and margin growth is currently being executed. Revenue increased 41.3% in the first year of activating their Master Exit Plan®. All identified risks have been mitigated, including executing a funded buy-sell agreement. The company is currently on pace to reach $100MM in revenue in 2023. The business will be well-positioned to attract multiple buyers upon going to market, giving them leverage to choose a buyer who will offer the best price, terms, and cultural fit while confidently meeting their financial, business, and personal goals.
Copyright © 2023 Legacy Partners LLC | Exit Planning Advisors