Strategies for Closely Held Businesses: Navigating the Exit

HOST: MARCY SPIVEY: Welcome back to the Cherry Bekaert Private Client Services podcast channel. I am Marcy Spivey, the leader of our Private Client Services Group.

I am very excited to welcome our speakers today to kick off our three-part podcast series for closely held businesses.

In this episode, we are going to explore various exit strategies, why they matter, and when you should start planning.

Whether you are planning to sell, pass your business to family members, or plan for the sudden loss of key employees, having a well-thought-out exit strategy is essential.

I have Dave, Drew, and Jessica here with me today. Will you please start by briefly introducing yourselves? Dave, please start us off.

DAVE NISSEN: I am Dave Nathan, a partner at Cherry Bekaert. I have been a partner for over 40 years working with closely held businesses.

I think this is a really important topic, and I have two very qualified professionals with me today: Jessica Fairchild and Drew Hennet. I would like them to introduce themselves now.

JESSICA FAIRCHILD: Hi, Dave. Thanks for having me on; I really appreciate it.

I am Jessica Fairchild, a co-founder and partner at the law firm Croak Fairchild Duarte & Beres. We are headquartered in Chicago, although we have attorneys spread throughout the country.

My role at the firm includes co-heading our corporate group, which focuses on M&A and corporate work.

For the past 25 years, I have worked on hundreds of mergers and acquisitions transactions on both the buy side and the sell side.

DREW HINNANT: All right, Jessica and Dave, it is great to be with you all today. My name is Drew Hennet, and I am a Director in our Transaction Advisory Group at Cherry Bekaert.

My focus is typically on Quality of Earnings and helping buyers and sellers through the sell-side or buy-side for financial due diligence.

Ultimately, we provide advice to help the buyers or sellers through the exit to get them the best possible outcome. Thanks for having us here today, Marcy. I am excited to discuss this important topic with you and the listeners.

HOST: MARCY SPIVEY: Well, let us start with the basics. What exactly is an exit strategy, and why is it particularly important for a closely held business? Jessica, do you want to tackle that one first?

JESSICA FAIRCHILD: Yes, sure. Traditionally, when people think of exit strategies, they think of the sale of a business. That is the world I live in, but more broadly, I think of it as a transition.

It is a transition from the current ownership to new ownership with the goal of unlocking value for the existing owners. It also ensures the business continues to grow and prosper when it leaves its old ownership.

It creates a wealth generation situation while seeing the business through to its next phases. Most typically, it is a sale of some or all of a business, which is where we get involved.

However, we also see transitions among family members or from a single founder to a new group of owners. It can take a variety of forms.

It is important if a founder has spent their life fostering a business. They want to unlock the value they have built and ensure their "baby" finds continued life beyond them.

Founders do not necessarily want to be the leader of a business forever. It is vital to evaluate exit opportunities, whether through a sale or another transition, as the business life cycle continues.

DREW HINNANT: I completely agree. For an exit, you need to think about the reason behind it.

Is it retirement, or is it to reduce concentration risk in that specific asset? Perhaps it is to start a new venture.

Ultimately, you are trying to figure out your needs and goals. The exit strategy should focus on goals post-transaction, whether that is a lifestyle change or taking the company to the next step.

DAVE NISSEN: That makes a lot of sense. Sometimes the next generation or children are not the best successors, which poses challenges.

What are some other types of exit strategies that business owners should consider? Drew, do you want to summarize those?

DREW HINNANT: There are a few options. I will talk about four and then include one way to get liquidity that is not a full exit.

One option is going public through an IPO. This process takes a long time and a lot of capital.

Once you have IPOed, there are additional regulatory requirements and costs. Some owners want to keep things closer to the vest rather than having their audits be public.

Another option is selling to a strategic buyer. For example, U.S. Steel is currently being acquired by a competitor out of Japan.

On a smaller level, there are many reasons a strategic buyer makes sense, such as synergies to help grow the business.

We are also seeing Private Equity as one of the most compelling avenues for lower to middle-market businesses.

Many Private Equity firms want owners to stay on longer and keep some equity. This lowers risk while allowing the owner to watch the business grow through the next transaction.

The last true exit opportunity is liquidation. This is less attractive but remains a viable option, such as for a dentist office with expensive equipment.

Finally, a way to gain partial liquidity without exiting is a debt recapitalization. You do not reduce your equity stake, but you infuse the business with cash through debt.

You can take that cash as a distribution and invest it elsewhere while the business pays down the debt. The drawback is that you do not lower your ownership stake, and the interest payments lower future cash flow.

JESSICA FAIRCHILD: That is a great list. I would add that in family-owned businesses, there is often a transition to the next generation.

The founder may lead the business to a certain stage before family members step in. We work with clients on transition plans that allow the next generation to move into ownership.

This can unlock value for the founder while allowing the wealth to stay in the family. It is an important addition to the exit options already outlined.

DAVE NISSEN: Those are very good, complete options. Thank you very much.

What are some common challenges and mistakes business owners face when planning their exit? Jessica, do you want to start us off?

JESSICA FAIRCHILD: Happy to do that. I hate to call them mistakes, as it is a learning process if you have not been through it before.

One challenge is the emotional tie to the business. If you founded it, the idea of transitioning out is often underestimated by sellers.

We also see sellers fail to plan in advance. If a health or life event occurs and there is no plan, you end up in crisis mode where something must happen quickly.

Additionally, there is often a lack of understanding regarding the value of the business. Understanding what the market can bring is critical to entering the right sale.

Finally, if there is a group of owners, they must be on the same page. If three people want to sell and two do not, it is very hard to navigate.

DREW HINNANT: You are correct. Not knowing the process is a major factor. Owners often look for a specific value without understanding where that value comes from.

They might hear a friend at the country club say they sold their business for 10x, but that is not always the case for every industry.

Your business might be manufacturing while theirs was tech, leading to a different margin profile. Talking to trusted advisors helps provide a realistic expectation.

You should consult your wealth manager, accountant, lawyers, and bankers to guide you to the best possible outcome.

DAVE NISSEN: You are both hitting on the value of the business. We have a future podcast that will talk more about that, so we will not focus too much on it now.

However, knowing what the company is worth is valuable because you can then drive decisions to increase that value.

Timing is also critical. When should business owners begin to think about their exit strategy?

DREW HINNANT: When starting a business, you should already be thinking about an exit strategy. You do not want to start something without an option for when you want to retire.

Outside of initial planning, once the business is operating normally, you should plan 24 to 36 months in advance of a sale.

This allows you to talk to trusted advisors to understand what the business is worth and how to create that value.

JESSICA FAIRCHILD: That is a great answer. In the current environment, many businesses receive unexpected reach-outs from Private Equity or potential buyers.

If your business is mature, you should always have a view toward ownership's stance on a sale. Being ready allows you to respond quickly to potential interest.

People often underestimate the complexity of selling. The earlier the team can work on financial and legal planning, the better.

DAVE NISSEN: Great advice. Before we wrap up, do you have any final thoughts or tips for our listeners?

JESSICA FAIRCHILD: Get advisors around you who have been through the process. Finding a group that is less emotionally involved but experienced is invaluable.

Reach out to your network of other founders who have sold. Understanding what the process was like for them can provide both information and emotional support.

DREW HINNANT: Talking to advisors is paramount. Your wealth manager likely knows more about your financial needs than you do and can tell you exactly how much you need from an exit.

Talk to your bankers to understand the business's value. Consult your lawyers to help negotiate, maximize value, and minimize risk or tax burdens.

Finally, talking to an accounting firm like Cherry Bekaert provides honest feedback on what the business actually makes and what it is worth. Do not jump on the first offer that comes your way.

DAVE NISSEN: That is great information. It is so important to have a professional team experienced in the M&A and selling process.

I have seen cases where a family attorney or accountant who is not experienced in M&A tries to help, which can lead to unnecessary complications.

Firms like Croak Fairchild and Cherry Bekaert have the experience so that we are not learning on your dime. Thank you for your fabulous advice today.

It is clear that a well-thought-out exit strategy is essential for a successful transition and meeting personal financial goals.

HOST: MARCY SPIVEY: Thank you for tuning in to today's episode.

Don't forget to subscribe to our podcast channel for more insights and advice on managing your business effectively.

Until next time, I'm Marcy Spivey, and this has been Cherry Bekaert's Private Client Services podcast.