Realizing shareholder value: Private company exit strategies

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The perpetuation of ownership and the succession of management are among the most difficult challenges that a privately held business will ever encounter. The decisions surrounding these issues will determine what will become of the organization to which business owners have devoted their lives, and what will be the return on what is likely their most valuable financial asset.

We have created this series, Realizing shareholder value: Private company exit strategies, to guide privately-held business owners in the development and execution of an effective exit strategy.

Guide for privately-held business owners in the development and execution of an effective exit strategy

1. Making the decision to sell

The framework for developing an effective exit strategy 

Regardless of a particular investment or economic climate, early and thorough planning will optimize value. Proper timing allows the owner to invest in building the strategy, building the team, and managing the process. Early planning allows time to sufficiently understand the strengths of your business and to identify and shore up weaknesses. It allows sufficient time to understand how buyers perceive value. Early planning allows the owner to embed value in the organization and move it away from the individual.

Early and effective planning provides the knowledge that will allow you to drive the exit process rather than allowing potential buyers to gain control. Then, as you build your strategy, build your team, and manage the process, you will be better positioned to focus on running your business as the sale process runs its course. 

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2. Finding the right buyer

Seeing the business through the eyes of potential buyers and buyer types

Identifying the right buyer is dependent upon, first, identifying your goals. Do you want to retain a financial stake after the sale in order to participate in some upside potential? Or are you ready to completely cash out? Do you want to retire or do you want to remain involved in the business? If you want to remain engaged, what amount of control would you like to retain and for how long?

Finding the right buyer for your business is possible only when you have thoroughly considered your objectives and priorities, both business and personal and both financial (liquidity, sale price, taxation/estate planning) and non-financial (succession, legacy and reputation, employee and stakeholder concerns, family dynamics, and other special interests). 

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3. Preparing the business for sale

Tactics to consider as well as mistakes to avoid in preparing for the sale of a private business 

To achieve a successful sale, owners should start preparing early in order to minimize the risk of a failed transaction and to optimize the value shareholders receive. Such preparation begins by simply recognizing that divestiture is a natural part of a business’s life cycle. Success also requires understanding that a sale is a process like any other. It builds from a constructive mind-set and extends through a series of disciplined steps.

Early preparation is required so as to optimize value. A host of external and internal factors must be anticipated, coordinated, and managed; and an approach to mitigate those that come up and aren’t anticipated needs to be defined. Both market conditions and business conditions must be considered. 

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4. The deal process

The process of getting from negotiation to closing and explores ways to avoid pitfalls along the way

How to approach potential buyers and begin the actual sale process:

  • Revisit specific transaction objectives and priorities
  • Consider timing and market conditions
  • Line up internal resources and outside expertise
  • Structure the deal from a tax perspective
  • Determine a specific sales timeline

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