PDF Summary:The Exit-Strategy Playbook, by Adam Coffey

For business owners ready to transition out of their company, The Exit-Strategy Playbook by Adam Coffey offers a comprehensive roadmap. The first part breaks down the various types of buyers—from strategic companies seeking expansion or synergies, to private equity firms focused on financial returns. It also explains key considerations like whether the seller stays involved or reinvests proceeds.

The second part outlines steps for preparing your business for sale and assembling the right advisory team, be it financial experts for tax planning, lawyers to navigate deal structures, or M&A advisors for identifying buyers and managing the process. Coffey draws from his experiences leading companies through sales to provide a straightforward game plan for maximizing value while ensuring a smooth exit.

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He emphasizes that while owning property can offer benefits such as expense control, it can also complicate the sale process and potentially reduce the overall value of the company. Buyers often focus on the key operational aspects of a business, and when property ownership is part of the equation, it can shift their focus away from the core business functions, which might lessen the attractiveness of the transaction.

Draft a contract for renting out the property to the business entity at a rate that reflects the current market value, ensuring a steady stream of revenue.

Coffey recommends establishing a leasing contract at prevailing market prices between the business and the newly established entity in possession of the property. The seller still generated income from the property following the sale of the business. Additionally, by providing a lease agreement aligned with current market conditions, it demonstrates the company's robustness to potential buyers and protects against the possibility of significant rent increases after the purchase. This might enhance the confidence of prospective purchasers, which could lead to a higher valuation of the company's value.

He emphasizes the importance of obtaining lease agreements that reflect current market conditions and avoiding excessively long durations. Buyers may grow cautious if the lease conditions are exaggerated, which could lead to discussions for amendments or even the full dissolution of the contract. Drawing from his personal journey with WASH, Coffey recounts how the proprietors successfully developed a steady income flow through rental contracts by treating the real estate as an independent asset, which continued to yield profits even when the main company had been divested. This method simplifies the deal process and guarantees enduring economic security for the individual selling.

Streamlining business processes

Determine whether you, the seller, plan to stay involved in the business or exit entirely, and prepare a succession plan accordingly.

Coffey advises entrepreneurs to set long-term goals that determine their level of engagement with the company after its sale, or whether they will sever all ties. This choice will greatly influence the story conveyed to interested purchasers. For individuals planning to leave, it's crucial to devise a robust plan for leadership transition.

The author emphasizes the necessity for buyers to grasp the factors that will sustain the firm's expansion and prosperity after the transition, regardless of the involvement of the former owner. The buyer must ensure the presence of a strong management team capable of maintaining existing partnerships, customer relationships, and revenue streams after the seller departs from the company.

Develop a story that accentuates the company's growth, highlighting its enhanced revenue and the potential for upcoming mergers and acquisitions.

Coffey advocates for the creation of an engaging narrative of growth to share with prospective purchasers. The story should highlight the company's capacity for expansion, emphasize opportunities for organic growth, profit enhancement, and the potential for strategic mergers and acquisitions. He advises developing specific strategies for expansion, such as exploring new markets, introducing innovative products or services, improving operational efficiency, or engaging in amalgamations with entities that enhance one's existing operations.

He stresses the importance of demonstrating a clear path towards accelerated growth, as buyers are primarily interested in companies with strong future potential. A persuasive story of growth can significantly boost the company's market value by attracting buyers who are willing to pay a premium for the opportunity of rapid expansion.

Demonstrate the company's resilience and adaptability in the face of economic adversities or crises, including the COVID-19 pandemic.

Coffey underscores the necessity of demonstrating the resilience and adaptability of a business, particularly in times of economic downturns or unexpected occurrences like the COVID-19 pandemic. Showing how the business withstands challenging times can significantly enhance the confidence of potential buyers, who place a high value on stability. He recommends highlighting the organization's resilience and historical performance during previous economic downturns, as well as outlining strategies to navigate potential future instabilities.

He underscores the necessity for sellers to thoroughly evaluate the company's performance spectrum, from its utmost heights to its deepest lows throughout different economic cycles, because buyers pay particular attention to its robustness and track record during times of economic decline. By illustrating the ways obstacles were overcome and highlighting the business's robustness or its ability to evolve and expand, owners can successfully diminish perceived dangers and enhance the attractiveness of the enterprise to potential buyers.

Other Perspectives

• While preparing the business for sale is important, it can also be costly and time-consuming, potentially diverting resources from other critical business operations.
• Understanding EBITDA is valuable, but it's not the only financial metric that matters. Other metrics like free cash flow might be more relevant to certain buyers or industries.
• Accrual-based accounting provides a clearer financial picture over time, but it can also be more complex and less intuitive than cash-based accounting, which might be sufficient for smaller transactions or certain types of businesses.
• Separating real estate ownership can simplify the business sale, but it might also reduce the overall value of the assets if the real estate is a significant part of the business's value proposition.
• Establishing a lease agreement at market rates can generate revenue, but it could also introduce new complexities and responsibilities, such as acting as a landlord, which not all business owners are prepared to handle.
• Deciding on post-sale involvement is crucial, but the ideal scenario can vary greatly depending on the seller's goals and the buyer's needs, and some buyers may prefer that the seller stays involved for a transitional period.
• Developing a growth story is strategic, but it must be realistic and credible; overpromising can lead to post-sale disputes or earnouts that are not met, which can damage the seller's reputation.
• Demonstrating resilience and adaptability is important, but it's also essential to be transparent about the risks and challenges the business may face; not all buyers will be comfortable with the level of risk, even if the business has a history of resilience.

Forming the Consultative Group

Coffey underscores the importance of assembling a team of expert advisors to steer through the intricate process of selling a business. The team should consist of specialists in their fields who can provide knowledgeable advice to ensure optimal conditions and to make the transaction process proceed without any issues.

Financial consultants and bookkeeping professionals

Consult with a taxation specialist to anticipate the financial implications of the deal and consider options such as moving to another state.

Coffey emphasizes the necessity of engaging tax professionals to understand and mitigate the financial effects associated with the deal. The location of the seller's home can significantly affect the overall financial outcome of the sale, especially in deals that involve substantial sums of money. He advises relocating to a jurisdiction with more advantageous tax conditions well in advance of completing the deal.

He advises seeking guidance from tax professionals to thoroughly assess the business structure, be it a sole proprietorship, a limited liability company, an S corporation, or a C corporation, and to understand how different deal structures, like the transfer of assets or company shares, will affect the tax liabilities of the seller. By proactively consulting with tax advisors and planning ahead, sellers can significantly reduce their tax liabilities and increase their total profits.

Seek advice from an expert in corporate taxation to understand the implications of asset-based transactions versus stock-based ones, ensuring compliance with the correct financial reporting procedures.

Coffey underscores the necessity of enlisting a tax expert with a focus on commercial matters to skillfully navigate the complexities unique to asset-related dealings as opposed to stock-based transactions. The seller's financial outcome can be significantly affected by the choice of a suitable corporate structure, which carries different tax consequences. Coffey observes that vendors frequently choose transactions involving company shares to benefit from tax-related incentives, while purchasers typically prefer agreements based on the acquisition of assets to reduce potential liabilities.

He recommends collaborating intimately with a specialist in business taxation to meticulously assess both options and comprehend the economic consequences, benefits, and drawbacks associated with each. Possessing thorough understanding, sellers can make choices that may advantage everyone involved. A proficient consultant ensures that every financial operation adheres to the requisite standards and regulations, thereby streamlining the due diligence process and reducing potential complications.

Lawyers

Hire a lawyer who specializes in business transactions, rather than a general practitioner, to ensure you receive optimal terms and conditions.

Coffey emphasizes the necessity of enlisting a lawyer who specializes in business transactions rather than a general legal advisor when one is in the midst of selling a business. He argues that employing an individual with a diverse skill set solely due to their hourly wage may seem cost-effective at first, but the lack of specialized knowledge could result in higher costs and setbacks for the service provider. An expert, conversely, possesses an in-depth comprehension of the particular legal intricacies associated with deals, guaranteeing that the seller obtains the most advantageous conditions and adequate protections within the agreement of sale.

He underscores the importance of engaging legal experts familiar with the sector's standards, typical deal terms, and potential risks to safeguard the interests of the seller against unfavorable terms or hidden pitfalls. Their expertise aids in steering through complex legal issues, minimizes potential disputes, and secures the most advantageous outcome for the seller.

Work closely with your legal advisor to pinpoint the optimal approach, considering the advantages and disadvantages of deals structured around assets versus those centered on stock ownership.

Coffey advises sellers to work closely with their legal advisors in order to understand the pros and cons of asset-based transactions compared to stock-based transactions, which will help them identify the best approach for their specific situation. He explains that while stock deals are often preferred by sellers for their tax advantages, they can expose buyers to greater risk due to potential liabilities associated with the company's history. In contrast, while asset transactions provide purchasers with greater authority over the liabilities they take on, this could also lead to tax implications that may be less beneficial to the seller.

Coffey underscores that a multitude of factors, including the type of business, its history, and the specific goals and concerns of the buyers and sellers, shape the choice of conducting a sale through assets or shares. A skilled lawyer can guide the seller through the complex decision-making process, assisting in assessing the potential risks and rewards of each choice to secure the most favorable deal structure.

Financial Consultant for Mergers and Acquisitions

Bankers play a crucial role in crafting promotional materials, identifying potential buyers, and managing the entire sales process.

Adam Coffey draws a parallel between the role of an investment banker or transaction advisor in the sale of a company and the duties of a real estate agent in the context of a home sale. These adept go-betweens handle a variety of essential responsibilities to guarantee a smooth transition of ownership within companies. Creating marketing materials like previews and non-disclosure documents, identifying potential buyers interested in acquiring the company, and managing the entire sales process effectively.

He emphasizes that bankers, due to their deep understanding of the market and extensive connections with potential buyers, excel at identifying suitable parties and creating a competitive environment that can significantly increase the financial worth of the deal. They act as go-betweens, handling sensitive conversations and confidential information, ensuring a smooth handover while preserving the secrecy of all entities engaged in the acquisition. He advises seeking the assistance of a financial advisor to ensure the business owner stays focused on running the company while the transaction progresses without interruption.

Investment bankers typically charge a commission that is a proportion of the overall value of the deal, and this proportion tends to diminish as the size of the deal grows.

Coffey explains that the remuneration for investment bankers is typically a percentage of the overall deal value. As deals grow larger, it's common for the rates of commission to decrease correspondingly. The writer clarifies that deals valued at less than $10 million can incur charges ranging from 3-6%, while transactions surpassing $500 million are typically subject to fees that vary between 0.5-1%.

He suggests that although the expense associated with fees matters, the value and connections a banker brings to the table can greatly affect the ultimate selling price, which may justify the fees charged for their services. He recommends choosing a financial advisor with a proven track record of successful deals in your sector and price bracket, who also has the skill to skillfully navigate the complexities of a sale, identify suitable buyers, and increase the value of your company.

Other Perspectives

• While expert advisors are valuable, their fees can significantly reduce the net proceeds from the sale of a business, and not all advice may lead to a positive return on investment.
• The necessity of a specialist team might be overemphasized for smaller transactions, where the cost of such expertise may outweigh the benefits.
• Tax implications can be complex, but sometimes the cost of moving to another state to save on taxes may not be practical or beneficial when considering the broader implications for the business owner's personal life and the business operations.
• Engaging tax professionals is important, but their advice is only as good as the information provided to them; sellers must ensure they have accurate and comprehensive financial records.
• Proactive tax planning is beneficial, but tax laws can change unpredictably, potentially undermining strategies that are put in place well in advance of a deal.
• The assumption that a corporate taxation expert can always navigate the complexities of a deal may not hold true in every case, especially in rapidly changing regulatory environments.
• Specialized lawyers command higher fees, and for some straightforward transactions, a general practitioner might provide sufficient legal support at a lower cost.
• The choice between asset-based and stock-based transactions is not always clear-cut, and in some cases, the perceived advantages may not materialize due to other factors such as market conditions or buyer preferences.
• The role of bankers in managing the sales process is crucial, but sellers should be aware that bankers' interests may not always align perfectly with their own, as bankers are incentivized by the size of the deal.
• The commission structure for investment bankers might encourage them to push for a higher sale price, which could potentially alienate reasonable buyers or lead to protracted negotiations that are not in the seller's best interest.

Engaging in the commerce of goods or offerings

Coffey outlines a systematic strategy designed to increase value and ensure a smooth and swift transaction. He underscores the necessity of maintaining transparent dialogue, meticulous planning, and consistent interaction with stakeholders during every stage of the process.

The coordination of promotional activities and the sequence of operations.

Keep your employees informed about the possible sale and involve key staff members throughout the process.

Coffey emphasizes the importance of keeping employees informed throughout the entire business sale process, pointing out that involving key staff members from the start and regularly keeping them abreast of progress can alleviate concerns and reduce disruptions. He argues that being open about a possible sale, while carefully maintaining confidentiality, can foster trust and encourage employees to deliver their best efforts during the evaluation period, which can facilitate progress in negotiations and attract proposals from prospective buyers.

He recommends forming a specialized team that includes key members from the financial, operational, human resources, and customer acquisition and marketing sectors to oversee the divestiture process. The team will work closely with the investment banker during the transaction, responding to due diligence questions, engaging with potential buyers, and presenting an attractive story of the company's potential for expansion. Coffey emphasizes the need for transparency and teamwork to create a positive image with prospective buyers, thus reinforcing their confidence in the company's management and stability, which consequently increases the value of the business and makes the transition smoother.

The usual procedure for a sale starts with an initial teaser, followed by the execution of a confidentiality agreement, distribution of a detailed information packet, and progresses through casual conversations, meetings with top management, and a phase where solicitations for competitive offers take place.

Coffey details the essential stages typically encompassed within a transaction.

• A one-page document is designed to pique the curiosity of prospective purchasers by highlighting the key features and financial details of a company while keeping its identity confidential.
• Before being granted access to detailed information about the business, interested parties must enter into a legally binding agreement, commonly known as a non-disclosure agreement (NDA), to preserve confidentiality.
• The Confidential Information Memorandum (CIM) or Presentation (CIP), typically a detailed document ranging from 50 to 100 pages, provides a thorough examination of the business, including financial specifics, assessments of the market, strategies for growth, and insights into the key management team members.
• Initial gatherings, usually casual in nature, are organized to address inquiries and foster a relationship between the seller and prospective purchasers.
• Interested purchasers express their preliminary intentions by submitting non-binding proposals following their review of the Confidential Information Memorandum or Confidential Investment Profile, often referred to as a preliminary expression of interest.
• During formal presentations and question-and-answer sessions, the company's leadership team, which is up for sale, has the opportunity to interact with potential buyers, showcasing the operational capabilities of the business and the proficiency of its executive team.
• After engaging with the company's executives, buyers often present revised and detailed propositions, typically referred to as expressions of interest.
• Exclusivity: The primary entity involved is allocated a specific period to conduct a detailed analysis of the company's intricacies and finalize the conditions of the acquisition, thus bringing the auction phase to a close.
• The buyer, along with their advisory group, conducts a thorough analysis encompassing the financial, legal, operational, and other aspects related to the business entity.
• A Sale and Purchase Agreement constitutes a binding contract outlining the conditions and terms governing a sale.
• The final stage concludes with the formal transfer of ownership to the buyer.

Coffey emphasizes the significance of every phase in the process, starting by broadly garnering interest and then narrowing focus to a dedicated group of buyers. He emphasizes that the procedure necessitates meticulous scheduling and diplomatic discussions, which frequently entail tough choices and possible concessions.

Engaging with potential purchasers

Hone your succinct self-introduction and enhance your ability to communicate with prospective purchasers throughout the selling journey.

Coffey emphasizes the necessity of adept communication in attaining success, highlighting that interactions with prospective buyers present a chance to craft a captivating story centered around the businesses. He underscores the necessity of developing and regularly practicing a concise, captivating elevator pitch that clearly conveys the distinct advantages and potential for growth inherent in the enterprise. He also recommends that those looking to sell should enhance their ability to present effectively, underscoring the importance of clear, persuasive communication that fosters excitement and confidence in potential buyers.

He advises the leadership group to rehearse their presentation thoroughly, ensuring that every participant can respond to anticipated inquiries with confidence and is completely prepared for their specific responsibilities. He advises creating plans tailored to various scenarios and alleviating the concerns of prospective purchasers by crafting a narrative that aligns with their needs and persuades them of the business's growth prospects.

Maintain a professional demeanor at all times, as potential purchasers are attentively observing your behavior and poise.

Coffey recommends that sellers consistently exhibit professionalism and stay vigilant throughout every phase of the transaction, including informal events like dinners or social gatherings. Adam Coffey emphasizes that personal attributes like character, integrity, and leadership abilities are consistently assessed by potential buyers, not just during formal meetings but in all interactions. He recommends that sellers exercise caution and refrain from any actions that might adversely influence how potential purchasers view the situation.

He recounts an incident where the deal was interrupted due to the seller's improper behavior during a meal with a potential purchaser. Coffey emphasizes the necessity of maintaining a professional demeanor and avoiding informal discussions, which enables the seller to focus on emphasizing the company's strengths and achieving the best possible outcome.

Regular revenue flows and continuous financial support.

Reinvesting a portion of your profits into the business could yield future financial rewards.

Coffey underscores the importance of reinvesting some of the funds obtained from the sale into the business when it transitions to new leadership. The strategy showcases the seller's dedication and ensures that their objectives are in harmony with the buyer's, especially when the seller continues to have a role in the company. He emphasizes the necessity of reinvesting to boost profits, providing several chances for stakeholders to gain from the company's expansion prior to its eventual sale.

Adam Coffey advises that while the allure of immediate financial rewards is strong, sellers who choose to reinvest can capitalize on the expertise of private equity firms in growing businesses, potentially resulting in significantly greater earnings in the future. He illustrates cases of profitable reinvestments, highlighting scenarios in which sellers achieved higher financial gains from subsequent deals than from the proceeds of their initial sales.

Explore different methods to maintain income streams, such as providing financing solutions for sellers, leasing out property, or setting up consultancy agreements.

Coffey advises exploring various methods to maintain revenue after the sale, such as offering financing to the purchaser, renting out property, or engaging in advisory services. These contracts can provide ongoing economic security and allow the seller to retain some level of participation in the business as they transition to a new stage in their life.

He offers concrete examples like extending credit, leasing premises, or providing guidance during the transition to the new owner. These options not only provide alternative sources of income but also show a readiness to collaborate closely with the purchaser to guarantee the continued prosperity of the business. Through careful consideration of these alternatives, sellers can develop a comprehensive and financially advantageous strategy for their exit.

Other Perspectives

• While transparency is generally beneficial, there may be strategic reasons to limit information sharing at certain stages of a sale to protect competitive advantage or manage stakeholder reactions.
• Involving employees early in the sale process could potentially lead to anxiety and turnover if the sale does not proceed, which could destabilize the business.
• Forming a specialized team for the divestiture process might not be feasible for smaller businesses with limited staff, and it could distract key employees from their primary roles.
• The outlined sale procedure assumes a one-size-fits-all approach, but different types of businesses or industries may require a more tailored process.
• Meticulous scheduling and diplomatic discussions can be ideal, but they may also slow down the process, potentially leading to missed opportunities in a fast-moving market.
• Over-preparing communication and presentations can sometimes result in a lack of authenticity, which savvy buyers can detect and may find off-putting.
• Professional demeanor is important, but overly formal behavior can sometimes hinder the development of a genuine rapport with potential buyers.
• Reinvesting in the business post-sale assumes that the seller has the desire and capacity to continue involvement, which may not align with their personal goals or financial needs.
• Alternative income streams post-sale, like leasing property or consultancy, may not be as lucrative or desirable as a clean break, especially if the seller is looking to retire or invest in different ventures.