Exit Planning

While there are many reasons for exiting a business, a thoughtful strategy for executing the transition will not only increase the chance of success, it will also increase the value of the business being sold.

The benefits of proper exit planning include
· Control of how and when the exit of the business is conducted
· Dignity for stakeholders who are negatively affected by the exit
· Maximizing the value of the business
· Shorter due diligence and transition period
· Have multiple transition options to choose from

Develop A Comprehensive Exit Plan
A comprehensive exit plan includes elements that address questions such as
· Exit Objectives – What does the management team hope to achieve by exiting the business?
· Exit Options – What is the preferred option?
· Valuation of the business – What is a fair offer?
· Stakeholder Analysis – Who should be involved in the exit planning?
· Determination of value drivers and cash flows – How can you maximize the business value in the short term to negotiate better offers?
· Implementation Plan – What are the steps to sell or dispose of the business?

Set Your Exit Objectives
The first step is to set the exit objectives. What does the management team want to achieve? The highest cash offer? The quickest sale? The objectives will depend on the reasons why the business is being exited in the first place. An exit objective because the parent is bleeding cash is very different than an exit objective for a profitable entity which simply no longer meets the strategic objectives of the parent.

Determine Your Exit Options
Next, engage a team of experts that can help you develop a set of exit options. Depending on the size of your firm, resources may be internal or you may need to hire external consultants. Typically, these would include a CPA, attorney, and appraiser. This might be one individual or a group of people.

Conduct a detail analysis of your exit options along with a rank ordering of the options. These may include the sale of the business to a 3rd party, an inside transfer of the business to a management team, or liquidation. As you refine these options, you may have to conduct the next steps (valuation and stakeholder analysis) and come back to finalize the preferred option in order to have a complete picture.

Determine a value for your business
Use your team of experts to come up with a reasonable value of your business. While there are a variety of approaches to utilize, the three main approaches are

· Income approach – Using your current income stream and a discount rate to determine the present value of that income stream. Discount rates used are typically related to the cost of capital (such as weighted average cost of capital or the use of a model such as the capital asset pricing model).

· Asset approach – This determines the value of your business based on the assets on the balance sheet (inventory as well as plant, property, and equipment). The assets are adjusted to fair market value which means a valuation may need to be done on each asset class.

· Market approach – This determines the value of the business based on other recent similar transactions (i.e. businesses that have been recently sold) that have occurred. This approach typically uses public information (such as stock price, earnings of public companies, sales, and revenues to find comparable companies).

As part of determining the value of your business, it is also important to consider what the optimal deal structure would look like. Is a cash sale preferred? What a stock transfer be acceptable? Determining these now will provide guidance as to which type of buyer would be best for the business.

Conduct Stakeholder Analysis
As part of looking at what your business is worth, you should also conduct a stakeholder analysis. Be mindful not only of economic stakeholders, but also social stakeholders as well. To name just a few groups:

· Staff
· Customers
· Shareholders
· Suppliers
· Business Partners
· Local Interest Groups
· NGOs
· Media
· Trade Unions
· Regulatory Parties

Consider mapping the stakeholders against a matrix of ‘Interest of Stakeholders’ and ‘Influence/Power of Stakeholders’ to determine how to appropriately work with and communicate to each of the stakeholder groups.

Summary
Exit planning can be a trying time for everyone involved and needs to be carefully managed. With proper planning, this can be achieved.

Jonathan Collins is a senior manager for KPMG China in Hong Kong.
Jonathan publishes business and technology insights for CFOs at
http://cfonewsletter.blogspot.com