On June 25, Corporate and Securities partner Alan Gaynor and Trusts and Estates counsel Joann Palumbo were featured panelists at Vistage's breakfast forum, "Why You Need an Exit Strategy Today." The panel was focused on the intricacies of business exit strategies and succession planning for closely held business owners. Other panelists included a tax adviser, an economist and two investment banking specialists.
Alan and Joann discussed various sell-side techniques for closely held business owners, internal succession planning, third-party sales, valuation methodologies, key employee retention techniques such as equity and phantom equity-based compensation models, and restrictive employment covenants, alternative deal structures, management buy-outs, wealth succession and preservation, and sell-side private equity trends such as earn-outs and rollover equity plans.
In addition, panelists presented the tax benefits of employee stock ownership plans and trends in the private equity industry. It was a lively breakfast forum, and robust discussions among the panelists and the audience ensued regarding how best to prepare and plan for an exit, whether the exit is "internal," via a sale to key employees or business partners, or "external," via a sale to third parties through a controlled market check or auction.
From the nature of the questions, it was apparent that although business in America, and how it is conducted, has changed dramatically and continues to evolve, the fundamental issues and best practices associated with sell-side transactions remain constant.
For those planning to sell their businesses, consider the following:
- Sale transactions do not occur overnight, and buyers today are cautious and skittish. If you want to sell, plan prior to entertaining terms sheets and letters of intent.
- Plan your succession strategy while you are still vital to your business and its clientele. Simply, you will not command as meaningful a sales price if you first negotiate when disabled or infirmed. In fact, all too often, businesses in America are stolen from business owners when the owner ceases to be vital and a succession plan was not previously adopted. Further, buyers of closely held businesses often expect owners to consent to a sizeable portion of the acquisition consideration be in the form of contingent (predicated on future performance of the acquired business) payments in the form of "earn-outs," and hence, these buyers "bank" on the vitality of such owners post-closing.
- Assemble your team. Whether your sale is internal, to key employees, or external, to third parties, at a minimum, you will need accountants and lawyers, perhaps an investment banker or other financial adviser capable of sharing the details of comparable industry deals. Further, if your sale is external, the team will likely also include business brokers to "shop" the deal.
- If selling to an institution, such as in a "roll-up" transaction or strategic sale to a much larger industry participant, act like an institution, adopting good, if not best, corporate practices prior to initiating a sales process.
- Incentivize your key employees and junior partners, whether with equity grants, phantom equity grants, deal bonuses conditioned upon deal success and the like.
- Restrict your key employees and junior partners with properly crafted employment and partnership agreements, containing enforceable and protective post-termination restrictive covenants prohibiting post-employment competition, client raids and other forms of unfair competition.
- Address and tend to your "warts" long before signing a term sheet. As we know, businesses are often sold for a multiple of earnings or revenue. If a problem arises after a term sheet is signed, the impact of the problem could easily be a reduction of your purchase price equal to the applicable deal multiple, applied to the worst-case outcome for the problem at hand. Further, if the problem is first brought to the attention of the buyer after a sales agreement has been executed, but prior to a sale's closing, not only can that information break up a deal, but if the potential buyer is an industry competitor, your competitor is now aware of your problems.