It’s a question that might have crossed your mind in the past. When should I create an exit strategy? The common response from industry consultants is “now.”
Frankly, the day you start your landscape business, you should have an end goal in mind.
“They should be aware that they might get approached on any given day by a qualified buyer,” says Tom Fochtman, CEO of Ceibass Venture Partners based in Arvada, Colorado. “The saying ‘We’ll make you an offer you can’t refuse’ might occur. Have your business ready to sell all the time. All business decisions should be made with the intention of increasing the value of the company.”
Fochtman adds that the purchase of assets, implementation of systems and procedures, building the management team and taking on the right work are all very deliberate decisions that should be made with the business value in mind.
Key Elements of an Exit Strategy
Fochtman says the first step to your exit strategy should be building a ‘best- in-class’ company. Not only do best-in-class companies attract the best people and perform best-in-class work, but they are also the first company a potential buyer will contact when they’re looking at your market.
“They don’t have growth issues because this is the company clients want to hire,” Fochtman says. “These companies don’t have dated assets. They have good to great facilities. They recruit at NCLC and through other sources. They have created a name in the community by giving back. The benefits of being the best-in-class company in your market are endless.”
Ron Edmonds, principal consultant with the Principium Group, based in Memphis, Tennessee, breaks exit planning down into six steps.
Identify Your Goals: Consider when you want to retire or exit your business. The more time you have, the more you can accomplish. Think through how much money you need to execute your other plans and live comfortably. Edmonds says a financial advisor can help you determine how much you are relying on the value of your business to fund your retirement. Figure in your nonfinancial goals as well.
Make a Realistic Assessment of Your Business: Figure out how much your business is worth currently.
“Most business owners will need help with understanding the value of their business,” Edmonds says. “Many owners have unrealistic information based on what they have heard about other transactions that may not be similar to their own situation. An M&A advisor or a valuation professional can help with this.”
Build Your Business to Achieve Your Goals: Once you know what your business is worth, create a plan to grow your top-line growth as well as your earnings and your EBITDA. Edmonds says that improving top-line and bottom-line growth can exponentially increase a business’s value.
“For example, if a business has $10 million in revenue with a 15% EBITDA margin and you might be able to get a 5x multiple,” Edmonds says. “If the business can grow the top line 20% and the EBITDA margin from 15% to 20%, you might qualify for a higher multiple, say 7.”
Fochtman notes your company must have a pattern of annual growth and profits. He says you should also only take work that fits your company profile.
“10% pretax net is the lowest acceptable profit,” Fochtman says. “15% and above is becoming the norm and there are plenty of companies hitting 20+% today.”
Assess and Reevaluate Periodically: As situations change, regularly reevaluate how your business is performing to stay on track with your exit plan goals. Edmonds says an update to your plan should be part of your annual planning cycle. Pay attention to the market and who the buyers are so you can build your company accordingly. Merger and acquisition activity is cyclical.
“If it is important to exit the business by a certain time and the business is ready to be sold and the owner is ready to sell, it is a good idea to consider alternatives that may develop, even if it is sooner than the owner has been planning for,” Edmonds says.
Protect the Value of the Business: You can’t prevent unforeseen developments from happening, but you can create contingency plans to minimize their impact on your business’s value. A good insurance program and asset protection plan can help.
Unlock the Value When The Time Is Right: When you are ready to sell, make sure you have relationships with the parties who can help you execute your plan. Fochtman says a major mistake is not engaging with the right professionals to assist them.
“A seller needs the best accountant, legal and investment banker on their team and they need to engage them early, as they are working their exit strategy,” Fochtman says. “The money they will pay in fees will be insignificant at closing due to the value and price increase they will receive.”
Advisors can provide a candid assessment of the business. They also have their pulse on the industry and can keep things on track.
“Exit planning is a perfect example of a process that many business owners will put off,” Edmonds says. “It is hard to focus on exit planning when you are dealing with the more immediate challenges of running your business every day. However, it really is important to get started at some point.”
This article was published in the November/December issue of the magazine. To read more stories from The Edge magazine, click here to subscribe to the digital edition.
