Transaction Support

It’s Time to Plan Your Business Exit Strategy

Posted on March 15, 2022 by

Tim Hilligoss

Tim Hilligoss

Ben Smith

Ben Smith

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Selling your business ownership stake at the right time – and for the right price – can be a challenge. To make matters even more uncertain, today’s buyers are more sophisticated than ever – especially with rising private equity influence. The earlier you start crafting an exit strategy, the better. If you wait too long creating your exit plan you could prolong your sale process, end up working longer than planned, or leave money on the table.

Understanding what buyers want

It goes without saying that buyers want to see a healthy balance sheet and cash flow. However, it takes more than that to command a highest multiple. Here are five factors that can impact your valuation:

  1. Key senior leaders who are willing to work with the buyer post-transaction
  2. A stable, engaged workforce that won’t flee the company once word of the sale is out
  3. A strong resume and pipeline in markets that the buyer wants to enter or expand
  4. Access to geography where your firm has solid government and supplier relationships
  5. Forward technology and/or business processes that are more efficient to buy than build

Of the five, the first two human factors can be surprisingly important to a successful deal. When it comes to incentives, concentration of ownership, and succession planning nuances, they may also require the earliest thinking on your part. It’s never too soon to start.

Keeping top staff engaged throughout a transaction

There are a couple reasons why executive compensation could be a crucial factor in your exit strategy. First, although your senior staff might be professionally ready to move up in your absence, they may not have the funds for a buyout. Second, their current incentives may not be enough to offset the uncertainty of a future with an unknown buyer or equity partner. Here are three management equity strategies that can help boost engagement and retention:

1. Phantom Stock: Sometimes referred to as “shadow” stock, a phantom stock plan allows senior employees to enjoy the benefits of stock ownership without diluting the equity of shareholders. Phantom stock follows the price movement of actual company shares and the benefit can be paid out on an “appreciation only” basis (calculated against the share value the day the plan was issued), or on a “full value” basis which includes the underlying value of actual shares.

2. Vesting Management Equity: Vesting management equity plans come in two main forms – benchmark-based, and, more commonly, time-based. Time-based vesting allows the employee to realize a graduated increase in an equity benefit amount (most often over a four-year period at 25% per year) following an initial year in which the employee is 0% vested. Companies may grant vesting for achievement of objective goals, such as a clearly defined billing or net profit target, or closing on a key executive hire who remains with the firm for a specified time.

3. Cash Equity: In cash equity plans, the employee receives money instead of a direct ownership stake in the company. This kind of incentive payment is preferred when you want to avoid dilution of ownership, or when a fractional stake in the company may be less motivating for the employee. Cash equity plans are especially useful when you want to reward performance achievements that may not be tied to your company’s stock price.

Continuing the conversation

We advise business leaders on structuring secure and profitable exit strategies. Contact us for a consultation on how to retain and reward the top performers that make your company valuable while ensuring the most profitable transition for you and your family.

Tim Hilligoss

Shareholder

Tim is known as an advocate & advisor for clients, guiding them through business transactions, tax issues, and international expansion.

Ben Smith

Shareholder

Calm & discerning, Ben is a shareholder in the firm’s consulting practice, working to optimize results for middle-market clients.

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