As a business owner considering executing a transaction, be it a majority sale or raising capital for growth, the identification and implementation of the right exit team to assist can be paramount to achieving success.
The exit team should be structured to ensure that all the bases are covered and it is the responsibility of the entrepreneur to know how to manage the diverse team of experts on the exit team. Advice is only helpful when its coordinated and positioned to drive the right result. Conflicting views can lead to confusion and trepidation in moving forward with confidence.
Empowering your exit team to work as a unit with the common goal of supporting you, the entrepreneur, is critical. Below are some best practice ideas about leveraging the key players on your exit team:
Board of Directors / Advisory Board
Entrepreneurs build a formal Board of Directors or an Advisory Board for many reasons, but chief among them is to build a team of experienced individuals that complement the skill sets of the founders and management.
A well-developed Board will often, either intentionally or not, include one or more individuals that have gone through an exit process, personally as an owner/entrepreneur or as an advisor to such a process.
An entrepreneur should set up these individuals as a sub-committee to the main Board to provide more targeted support during an exit process. Gaining knowledge of their skills and experiences early can position them as key in-house support to managing the broader exit team advisor group.
Financial / Mergers and acquisitions (M&A) advisor
Hiring an experienced M&A advisor is crucial to executing on a successful M&A process. A well-versed M&A advisor can provide support on valuation, buyer introductions and process management.
The right dynamics between the company and the M&A advisor is where the M&A team acts as an extension of the company’s management team. Management needs to focus on continuing to execute on the business operations and not take their eye off the ball in hitting and, ideally, growing their numbers.
A strong M&A advisor will allow this to happen through leading the process, managing potential buyer discussions, and dealing with information flow, all while keeping the entrepreneur informed.
It is imperative that the entrepreneur is on the same page with respect to valuation and desired outcomes. Gaining alignment at the front-end of the deal, while having the flexibility to respond to market feedback and dynamics, are crucial to the working relationship with the M&A advisor. If there are valuation differences between owner and advisor and these are not determined early in the discussion, this can lead to frustration later in the process. Valuation gaps can be bridged by knowledge and also through structuring a potential deal in alternative manners than may have been initially anticipated.
Accounting, tax and transaction services / Due diligence advisor
Your accounting and tax advisor should be engaged early in the process to ensure you are structured appropriately to maximize your exit position. Notwithstanding that multiple planning options may exist in a near-term sale scenario, vendors who have exit planning completed years in advance of an actual sale may have access to a greater variety of available planning alternatives and beneficial tax attributes to reduce their tax liability on exit. Identifying tax planning opportunities and considerations early on in the sale process will allow sufficient time to execute on the appropriate strategy to maximize the after-tax proceeds from the sale transaction and properly structure deal terms which may otherwise result in adverse tax consequences to the vendors. Mechanics such as earn-out arrangements, escrow holdbacks and purchaser equity consideration can create a taxable event at close if not appropriately structured. Paying tax when cash consideration is yet to be received is not generally preferred by most entrepreneurs.
The upgrading of financial systems and processes, and financial leadership where appropriate, can support a smoother transaction and also position the company for a higher valuation. Engaging your accounting advisor or, ideally, a due diligence advisor early to advise on these opportunities and assist in preparing the company for sale, can help ensure these items are managed.
Increasingly, sellers are utilizing a formal sell side due diligence advisor to prepare the financials that will go into a package to be shared with potential buyers. A sell side due diligence report that supports the information prepared by the M&A advisor gives potential buyers, and their financiers, increased confidence in the numbers on which to base their valuation and transaction structure. This also helps ensure that no surprises come up later in the process when the buyer’s due diligence team reviews the financials, which minimizes the risk of a potential deal failing.
Like your accounting advisor, your legal advisor will ensure you are structured appropriately for sale and no diligence issues exist that could de-rail a transaction. Hence, early involvement will ensure any potential concerns are dealt with. Establishing dialogue with your legal advisor may also support your M&A advisor in building a potential buyer list through their previous clients and current contacts. Leveraging this knowledge can ensure you reach many potential buyers, increasing potential competitive participation in the sale process, and hence maximizing value.
There are other advisors that may be on your exit team, formally or informally, that can support the process, including your banker, wealth advisor and business coach/mentor. Depending on the entrepreneur, company, or deal type, such parties may be more or less crucial to being formally a part of the exit team.
Transparency between the entrepreneur and advisors, and amongst the individuals that make up the exit team, ensures that everyone is aligned throughout the process. Keeping advisors at a distance, and not allowing direct communication reduces the impact of the exit team’s ability to cross-pollinate ideas and solutions to any issues that arise. Bringing the exit team together early and often will allow the entrepreneur to achieve the best possible result during a transaction process.