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Exit Stage Right By Driving Value

August 27, 2009 - Article

There are three certainties in life: death, taxes and you leaving the company you currently work for or own. Whether you are an owner, employee or both, you will disassociate with your current company – voluntarily or involuntarily. As an owner, it is important to create an exit plan and to create and preserve value within your company. As a result, in a transfer of ownership and value, buyers, sellers and others will each benefit.

The exit planning process starts with the business owner determining his or her objectives. In essence, the owner determines what constitutes a successful exit. This will differ from owner to owner and from company to company, but usually will address when to sell the business, to whom to sell the business and what after-tax income is required when the owner sells.

Determining Market Value. After the owner and company have fixed exit goals and objectives, it is necessary to determine a market value for the company. For exit planning purposes, whether it is for the company, the owner, or the employee, it is vital to know today’s value of the business. The early stage valuation will pinpoint factors that are critical to increasing or decreasing the worth of the business, will determine the amount of cash available from the company and will help design an exit plan to minimize the tax effects of a transaction.

The valuation process is an inexact science. There are various valuation techniques; each one has its inherent flaws and each one is used when its results support or refute a certain position of value. EBITDA, multiples, free cash flow and discounted earnings are some of the methods employed by business brokers, investment bankers and financiers. Ultimately, it is the amount and reliability of the company’s future cash flow that should dictate value. But regardless of the valuation methodologies used to establish a company value, the eventual sale price of the company will be that price which someone else – a third party, family member, co-owner or employee – is willing to pay.

The value of the business at the outset of the exit planning process will be different than the value of the business at the time of the perceived sale or transfer. During this time, the owner and the company should endeavor to implement actions to preserve and increase the value of the business. This will help in a sale to a third party, since the buyer will look to the strength of the business in assessing the value of the enterprise on a go-forward basis.

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