Sell! Sell! Sell!: Developing a profitable exit strategy for you and your company

October 25, 2001
By: R. Carter Freeman

Devising a strategy for selling your company that fits within your goals and current market conditions is essential

It is no secret that the tube and pipe industry is highly fragmented and comprises hundreds of small companies.

Several well-financed companies currently are mulling roll-ups, or consolidations, in the industry. Unless you are one of the big players who will be left standing after the game is done, one thing is certain: Your company eventually will sell, or it will cease to exist. Tough medicine, but it's true.

However, only 25 percent of companies put on the market actually sell. How can you ensure that you get what you want when it comes time to do the deal? The answer is sound exit planning.

Most business owners do not dedicate serious effort to preparing their companies to sell. Even companies that plan and budget regularly fail to consider how management's approach to operations and profitability may affect enterprise value and an eventual sale. Exit planning should begin at least a year before a target sale date. In a perfect world, it starts on a company's first day of operation.

Some of the essential considerations related to planning a sale include timing, strategies, value, and purchasers:


A company's market price-what buyers are willing to pay for it-can fluctuate dramatically over the company's lifetime. Careful planning, late planning, and pure luck can produce different outcomes, as the following case study illustrates.

Careful Planning. S company's owners designed an exit plan with an investment banker two years before implementing a well-orchestrated sales effort. The team achieved a price of more than $50 million, significantly more than its goal of $38 million and an original offer of $24 million.

Late Planning. The owners of a tube and pipe company delayed sale of their company while they obtained their QS-9002 designation required by their largest customer, an effort that consumed more than one year. During the delay, an economic downturn occurred, and that large customer jumped ship to a closer supplier.

The result was a 60 percent reduction in revenue. Subsequently, the company's sale price was one-third less than originally anticipated.

Luck. In a recent effort to solicit a buyer, a company understated its inventory valuation. Correcting the error would have resulted in a significant increase in profitability (and sale price) but also a potentially large income tax bill. Fortunately, the company's CPA discovered that the error occurred in a period for which the statute of limitations had run out. For the seller, that luckily meant no whopping tax bill.


All strategic planning begins with a vision.

Do you want to retire fully after selling, obtain a limited employment contract, retain a minority share indefinitely, or gain a senior career position as part of a much larger entity? What is your time frame?

Nothing is sadder than the once-successful owner who has failed to plan and then sells-or liquidates-only after significant decline and burnout and for a fraction of what the company was once worth.

Enterprise and Realization Values

Determining Value. Enterprise value, or asking price, usually is determined by a multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA), adjusted for various financial and subjective considerations. Realization value, or what you actually get, typically equals, at most, price less interest-bearing debt.

It makes little difference how many years it took to build the company or how much you have invested in machinery if you have no earnings to show for it. If you have a sales figure in mind, you need to achieve the kind of earnings it takes to get there. The primary reason companies do not sell is an unrealistic asking price.

Payment. Assuming you can get an acceptable price, how do you want it to be paid? In addition to cash and promissory notes, acquirers also commonly pay through consulting agreements, noncompetition covenants, and employment contracts. These may be combined with earnouts and other contingent payments (earnouts are based on a shared percentage of future profits, which can be defined in various ways).

For acquirers, contingent payments transfer a portion of the acquisition price risk to the seller. For the seller, contingent payments may serve to increase the ultimate price. Earnouts sometimes bridge the difference between the asking price and the final offer and also may offer tax advantages.

Potential Purchasers

Once you decide to sell, how do you attract buyers while maintaining the confidentiality needed to continue smooth operations? If you wait for them to contact you, you default to their timing, and the ideal buyer may never appear.

You also need to protect competitive information while marketing to industry buyers. An intermediary that specializes in corporate sales can resolve these issues.

Finding the right buyer often is more than a matter of price. Many owners want their enterprises to survive their departures. Therefore, they seek stability for loyal employees and customers. This may eliminate buyers that would relocate or resell the company in a couple of years.

The ultimate success of any business sale depends on presentation and negotiations. A seller should prepare a confidential business review that includes an extensive financial analysis and describes the company's history, current condition, and prospects.

During negotiations, both financial and subject matters must be considered. A skillful intermediary can help achieve the best results for the seller while buffering the parties from the stress of the transaction. After closing the deal, the buyer and seller must work together for a considerable amount of time. This requires them to forge a good relationship, which can be threatened by direct negotiations between the parties.

In the end game, focus counts for a lot. This really is the secret to successful sales strategies. Most business owners have limited experience in this kind of initiative.

Talk to industry peers. Read a book. Call your CPA. Consider an intermediary's services. Just don't leave the details to chance.

Your company's future depends on it.

R. Carter Freeman

CMC and Anthony J. Mulkern