For every privately held corporation, one of the most difficult, yet unavoidable decisions, will be implementing an exit strategy. In a recent five-part series titled Realizing shareholder value: Private company exit strategies, PwC identifies and explores the principal stages of developing a successful exit strategy: (1) making the decision to sell; (2) finding the right buyer; (3) preparing the business for sale; (4) the deal process; and (5) preparing for life after the deal.
- Making the decision to sell. Every ownership group can have different reasons to plan an exit, be it retirement, financial pressures or the desire to transfer the business to an heir. Whatever the motivation, defining objectives of the sale are key to developing the right strategy. Is liquidity more important than succession planning? Are you more concerned with the sale price or the future of current employees? Once these objectives are determined, the transaction can be structured to achieve your goals. Regardless of your objectives, the planning needs to start early so that all the relevant stakeholders are considered.
- Finding the right buyer. To find the right buyer, you need to decide how to structure the transaction to achieve your goals. This can be done through a (1) sale to a third party; (2) corporate partnership or joint venture; (3) employee stock ownership plan; (4) an IPO; or (5) selling to family. Each of these methods has advantages and disadvantages that may or may not align with your strategy. As previously stated, knowing what you want to achieve in the sale will make this decision easier.
- Preparing the business for sale. Early preparation is important at this stage. Continuing to run the business successfully and negotiating a sale can be difficult and there is a potential that competing interests can arise. Ensuring that the financial and human resources are not depleted throughout this period will create value for both the seller and the purchaser. Creating a dedicated internal team with strong external advisors will alleviate some of the pressures.
- The deal process. Before committing to a sale, it is advisable to consider: (1) if your objectives are still being met; and (2) whether market conditions have changed substantially. As long as these two issues are still manageable, issues concerning taxes, timeline of the sale, confidentiality agreements and negotiating key terms will be paramount. The services of an experienced legal professional cannot be understated at this stage.
- Preparing for life after the deal. Upon a successful closing, the issues that need to be addressed will be of a more personal nature. Personal income tax planning, financial planning, family issues, wealth transfer planning and planning for retirement will need to be faced head on. These issues can be dealt with by reassessing your objectives from a personal perspective and moving forward. Once these objectives are realized, future planning becomes manageable and achievable.
Planning an exit can seem daunting at the beginning because it is something that business owners typically will only do once in their careers. With proper planning, a strong team of advisors and an appreciation of the stages and issues that will be faced along the way, a successful exit strategy is within reach.
The author would like to thank Robert Corbeil, summer student, for his assistance in preparing this legal update.