The Exit Strategy Consultation:
Is It Time to Sell?
Advance Preparation for Selling a Multichannel Business
by Donald R. Libey
Selling a multichannel direct marketing business takes lengthy and often transformational preparation. To obtain the maximum financial advantage, it requires a focused, disciplined and tenacious strategic approach. I want to concentrate on the all-important strategies and tactics leading up to a sale of a business, a process that ideally starts well in advance of the actual event and, in many ways, is like your personal quest for an Olympic medal.
The End Game
The first tenet of preparation is to know what the end game is years in advance of the exit event. Whenever I consult with a CEO or owner of a direct marketing company, business-to-business or consumer, I always ask the same question: “What is your end game?” I have probably asked two hundred people that question and in only ten or twelve instances have I received a definitive answer with all the details spelled out. Most owners don’t know what their end game is.
The ‘end game’ is the ultimate disposition of the business. There are really only six possible end games:
- Sell to a strategic buyer;
- Sell to a financial buyer;
- Sell or leave to a family member;
- Sell to the employees;
- Liquidate the business;
- Die in possession.
Within these six primary end games are sub-end games. Selling to a strategic buyer may also mean selling to the existing management team in partnership with an outside source of financing. Selling to a family member may mean financing the sale for a period of time or raising the capital for the family member to use to buy the business. Selling to employees could mean an employee-owned business results (ESOP), or it could mean the senior managers purchase the business either with their own source of money, or financed by the owner. Selling to a financial buyer could be a partial or total sale. Dying in possession is actually the avoidance of all end game planning and may or may not have its positive advantages. The Point: The end game must be defined as early as possible so you can intentionally build toward that successful outcome.
Consider end game logic. If the business has the greatest value from a strategic sale versus a financial sale, the preparation for the strategic sale is entirely different from the preparation for a financial sale. An owner who has prepared a business for ten years for a strategic sale to a major competitor and then attempts to sell to a financial buyer, or to a group of senior managers, may well have prepared many of the wrong elements of the business. A strategic buyer often places less value on management than a financial buyer. The strategic buyer usually has competent managers and can integrate management of the acquisition. A financial buyer (often a private equity group) needs experienced and talented managers to continue to run and to grow the business. One wants and needs good management; one doesn’t. These entail very different strategies for developing management capability.
If a company is to be sold to or given to a family member, the advance preparation for that particular end game is especially critical. If the son or daughter is bright, talented and experienced, senior and middle management development may not be as necessary as when the heir is inexperienced or under-skilled. I have seen more instances of second generation under-performance as a result of poor end game preparation by the first generation that the opposite. Complicate that fact of life with the type of transaction where the second generation is required to pay the retiring first generation a ‘life annuity’ and very quickly we can pin-point where all the cash in the business is going. Suddenly, the business has to support two lifestyles, the kid’s and mom and dad’s. These elements of the intra-family transition need to planned in advance and literally ‘designed’ to achieve a successful transition.
Certain key elements repeat in transaction after transaction. When the exit strategy is defined as selling to a financial buyer, there is almost always a two-year program of enhancement of talent, response rates, customer file performance, online capability and sophistication, and inventory and fulfillment management. Why? Private equity groups are looking for ongoing top management talent, strong circulation fundamentals and analytics, online growth and dominance, clean inventory, and a solid fulfillment platform upon which additional business or smaller, add-on acquisitions can be layered.
Similarly, when the exit strategy is defined as selling to a strategic buyer, there is almost always a two-year or longer program of enhancement of market niches, product penetration, prospect circulation performance, and earnings. Why? Because competitors want new markets, new customers, new products, and solid earnings. They want scalability and growth in the twelve-month customer file. They are willing to pay more for that mix than they are for simply more of what they already have. The smart strategic seller looks at the business and the logical buyers and asks, “How do I make my company irresistible to my competition?” If that means tangential market development, or extraordinary customer retention and AOV, or cranking up the new product machine, so be it.
These are only a few examples of the absolutely essential need to define the end game as early in the life cycle of the company as possible. End game definition for some executives is easy; for others almost impossible. The end game involves emotion. The end game involves thinking about mortality and perhaps the intelligence of sons and daughters and their life preparation. The end game involves financial planning and knowing how to use and apply exit cash. One owner who really wanted to retire said to me several years ago when CDs were paying 2.5 percent, “Where can I put $30 million without risk and get a better return than in my own business as it is? Why sell?” The end game also involves being truthful with yourself. Do you really want to get out of the game? What will you do? Can you enjoy leisure? In short: What is your personal end game? Most people don’t have the answer to that question.
End Game Process
The process of mapping the end game begins with wanting to do it. I’ve worked with some owners who spoke about the process but clearly did not really want to go through the process. It was much simpler to do some surface discussions and write up a mini-exit strategy than it was to actually confront the demons and the horrors of selling the baby.
Most owners need a confidant—some one they can fully open up to who isn’t involved in the business. Usually this isn’t the board or even trusted advisors. This is someone with whom the owner has had a trusting, personal relationship. There have been five or six owners whose paths I have crossed where this was the relationship we had. There have been three or four who actually hired me for that purpose (and those were the best situations because they were intentional and driven to complete the process). There have been several dozen who were in the superficial mode, but didn’t have their heart (or brain) in the process.
The end game definition process takes discussion—of personal desires and goals; of family matters; of financial expectations; of timing; of employee skills and weaknesses; of many elements that go into the determination of the big picture end game. Mostly it takes complete honesty and a strong sense of reality. I have told many owners that the business will need five years and five million dollars of investment before it is ready to produce the type of financial expectation that they have for its sale. Few are willing to believe or buy that evaluation. They wind up getting very little in return for their denial.
The end game takes expertise. At a minimum, owners need strategic, industry expertise and deep knowledge of the players within the industry. You may be better off with a gray eminence than with a young CPA or MBA. You need wisdom first. Next, you need solid financial and investment banking advice and perspectives on the market outlook for a sale. Again, experience and track record are to be commended. Investment banking professionals are specialized and bring the unique understanding of valuation, business presentation, process management, negotiation, deal structure, and closing experience. Remember, you will sell the business only once. You need someone who has sold businesses hundreds of times, and that is the value for which you pay a fee. Third, you need excellent accounting and legal advice, especially when there are issues of “C” and “S” corporation status and asset versus stock sale, real estate, taxation, environmental remediation, non-compete agreements, earn-outs, and other financial and legal matters. In short: You need a team of seasoned professionals whom you trust and with whom you are comfortable.
The definition process is often a series of encounters, usually three separate days where the strategic advisor and you go through the elements of end game planning. From there, a transformational strategic plan may be necessary, including management participation, to conform the business to the defined end game. That is generally a six month process. Third, with the end game and the strategic plan in place, the investment banking portion of the process can begin and, with discussions and exploration, this can take anywhere from six months to several years. With a fully furnished investment banking plan, the accountants and lawyers can be brought in to prepare for the ultimate scrutiny of the business when buyers are identified at some point in the future. In all, the end game preparation is generally one to three years, sometimes longer.
A business that is sub-optimal in performance may take some time to turn in order to ultimately produce the greatest harvest for the owner. Forensic and remedial consulting, or perhaps a partial or near-total retooling or re-staffing may be necessary. What is sad is observing a business where the owner has denied problems and then decides it is time to sell without any thought to preparation. The end game does not even remotely match the performance of the business, the team is inexperienced, and the offers received are anemic and unsatisfying. Too often, that is the disappointing culmination of a lifetime of owning and operating the business. It’s a bit like being an athlete and not staying in shape, then going to the Olympics and not even making the cut-off, and having to go home with a rest-of-your-life memory of being just an also-ran. The gold goes only to those who prepare, train, face reality, go through the pain, plan relentlessly, use great coaches with experience and understanding, assemble teams and adjust to the conditions of the competition. At the starting line, you have to visualize the race, the finish line, the winning, the victory, the podium, the gold medal: The End Game.
Copyright © 2006 by Donald R. Libey. All rights reserved. May not be reproduced by any means without permission of the author. Contact Libey Incorporated; www.libey.com or call 877-903-9448.
