Exit planning

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Exit planning is the preparation for the exit of an entrepreneur from their company to maximize the enterprise value of the company in a mergers and acquisitions transaction and thus their shareholder value, although other non-financial objectives may be pursued including the transition of the company to the next generation, sale to employees or management, or other altruistic, non-financial objectives. [1] Exit planning differs from succession planning in that the later is a sub-component of exit planning, and refers to the hiring, training and retention of a successor President/CEO of the company in a planned manner. [2] Succession Planning is but one of the many considerations when conducting exit planning. [3] Company owners commonly do not see their company from the standpoint of a potential buyer, and thus, ignore the strategic management of the company. [4]

To achieve their desired outcomes, business owners often focus their attention on exit planning from the beginning of the investment, in order to prepare adequately for trade and financial sales, make effective use of the buy back option, market their businesses more widely for sale, use intermediaries and get the support of management [5] Significant value is lost due to an absence of or inadequate exit planning. Roughly 30% of businesses will be transferred to family member in some manner, 18% intend to sell to its employees, and many will simply be closed. [6] Up to one-third of businesses that are closed were successful at their termination [7]

The three sources of enterprise value in a company are firstly the value of its tangible assets, and secondly the value of its intellectual capital (intangible assets), which consist of human capital, relational capital, and structural capital (including is subcomponents organizational capital, innovation capital and process capital. Most of a middle-market company's and lower middle market company's value is derived from its relational capital, specifically, its customer relationships. [8] [9] SMEs, also referred to as middle market companies, create innovation capital (part of structural capital). [10]

Most small-to-medium-sized businesses use a boutique investment bank to market their company in a mergers and acquisitions transaction to potential buyers. Some boutique investment banks also offer exit planning preparation, while certain consulting firms offer one or more of the services needed to conduct exit planning, such as human resources, in connection with succession planning.

Private equity groups are common acquirers of middle market businesses, whether as "platform" companies or add-on or tack-on acquisitions.

In addition to business aspects, personal considerations need to be taken into consideration, including considerations about estate taxes, capital gains taxes, or other taxes. [11]

Related Research Articles

<span class="mw-page-title-main">Mergers and acquisitions</span> Type of corporate transaction

Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, business organizations, or their operating units are transferred to or consolidated with another company or business organization. This could happen through direct absorption, a merger, a tender offer or a hostile takeover. As an aspect of strategic management, M&A can allow enterprises to grow or downsize, and change the nature of their business or competitive position.

Business is the practice of making one's living or making money by producing or buying and selling products. It is also "any activity or enterprise entered into for profit."

Intellectual capital is the result of mental processes that form a set of intangible objects that can be used in economic activity and bring income to its owner (organization), covering the competencies of its people, the value relating to its relationships, and everything that is left when the employees go home, of which intellectual property (IP) is but one component. It is the sum of everything everybody in a company knows that gives it a competitive edge. The term is used in academia in an attempt to account for the value of intangible assets not listed explicitly on a company's balance sheets. On a national level, intellectual capital refers to national intangible capital (NIC).

Succession planning is a process and strategy for replacement planning or passing on leadership roles. It is used to identify and develop new, potential leaders who can move into leadership roles when they become vacant. Succession planning in dictatorships, monarchies, politics, and international relations is used to ensure continuity and prevention of power struggle. Within monarchies succession is settled by the order of succession. In business, succession planning entails developing internal people with managing or leadership potential to fill key hierarchical positions in the company. It is a process of identifying critical roles in a company and the core skills associated with those roles, and then identifying possible internal candidates to assume those roles when they become vacant. Succession planning also applies to small and family businesses where it is the process used to transition the ownership and management of a business to the next generation.

<span class="mw-page-title-main">Venture capital</span> Form of private-equity financing

Venture capital (VC) is a form of private equity financing provided by firms or funds to startup, early-stage, and emerging companies, that have been deemed to have high growth potential or that have demonstrated high growth in terms of number of employees, annual revenue, scale of operations, etc. Venture capital firms or funds invest in these early-stage companies in exchange for equity, or an ownership stake. Venture capitalists take on the risk of financing start-ups in the hopes that some of the companies they support will become successful. Because startups face high uncertainty, VC investments have high rates of failure. Start-ups are usually based on an innovative technology or business model and they are often from high technology industries, such as information technology (IT), clean technology or biotechnology.

<span class="mw-page-title-main">Small business</span> Business with fewer employees or revenue

Small businesses are types of corporations, partnerships, or sole proprietorships which have a small number of employees and/or less annual revenue than a regular-sized business or corporation. Businesses are defined as "small" in terms of being able to apply for government support and qualify for preferential tax policy. The qualifications vary depending on the country and industry. Small businesses range from fifteen employees under the Australian Fair Work Act 2009, fifty employees according to the definition used by the European Union, and fewer than five hundred employees to qualify for many U.S. Small Business Administration programs. While small businesses can be classified according to other methods, such as annual revenues, shipments, sales, assets, annual gross, net revenue, net profits, the number of employees is one of the most widely used measures.

Small and medium-sized enterprises (SMEs) or small and medium-sized businesses (SMBs) are businesses whose personnel and revenue numbers fall below certain limits. The abbreviation "SME" is used by international organizations such as the World Bank, the OECD, European Union, the United Nations, and the World Trade Organization (WTO).

<span class="mw-page-title-main">Business Development Bank of Canada</span> Bank in Canada

The Business Development Bank of Canada is a Crown corporation and national development bank wholly owned by the Government of Canada, mandated to help create and develop Canadian businesses through financing, growth and transition capital, venture capital and advisory services, with a focus on small and medium-sized enterprises.

Funding is the act of providing resources to finance a need, program, or project. While this is usually in the form of money, it can also take the form of effort or time from an organization or company. Generally, this word is used when a firm uses its internal reserves to satisfy its necessity for cash, while the term financing is used when the firm acquires capital from external sources.

Social venture capital is a form of investment funding that is usually funded by a group of social venture capitalists or an impact investor to provide seed-funding investment, usually in a for-profit social enterprise, in return to achieve an outsized gain in financial return while delivering social impact to the world. There are various organizations, such as Venture Philanthropy (VP) companies and nonprofit organizations, that deploy a simple venture capital strategy model to fund nonprofit events, social enterprises, or activities that deliver a high social impact or a strong social causes for their existence. There are also regionally focused organizations that target a specific region of the world, to help build and support the local community in a social cause.

A private equity fund is a collective investment scheme used for making investments in various equity securities according to one of the investment strategies associated with private equity. Private equity funds are typically limited partnerships with a fixed term of 10 years. At inception, institutional investors make an unfunded commitment to the limited partnership, which is then drawn over the term of the fund. From the investors' point of view, funds can be traditional or asymmetric.

A micro-enterprise is generally defined as a small business employing nine people or fewer, and having a balance sheet or turnover less than a certain amount. The terms microenterprise and microbusiness have the same meaning, though traditionally when referring to a small business financed by microcredit the term microenterprise is often used. Similarly, when referring to a small, usually legal business that is not financed by microcredit, the term microbusiness is often used. Internationally, most microenterprises are family businesses employing one or two persons. Most microenterprise owners are primarily interested in earning a living to support themselves and their families. They only grow the business when something in their lives changes and they need to generate a larger income. According to information found on the Census.gov website, microenterprises make up 95% of the 28 million US companies tracked by the census.

Business development entails tasks and processes to develop and implement growth opportunities within and between organizations. It is a subset of the fields of business, commerce and organizational theory. Business development is the creation of long-term value for an organization from customers, markets, and relationships. Business development can be taken to mean any activity by either a small or large organization, non-profit or for-profit enterprise which serves the purpose of 'developing' the business in some way. In addition, business development activities can be done internally or externally by a business development consultant. External business development can be facilitated through Planning Systems, which are put in place by governments to help small businesses. In addition, reputation building has also proven to help facilitate business development.

<span class="mw-page-title-main">Mittelstand</span> Small and medium-sized enterprises in German-speaking countries

Mittelstand commonly refers to a group of stable business enterprises in Germany, Austria and Switzerland that have proved successful in enduring economic change and turbulence. The term is difficult to translate and may cause confusion for non-Germans. It is usually defined as a statistical category of small and medium-sized enterprises with annual revenues up to 50 million Euro and a maximum of 500 employees.

<span class="mw-page-title-main">Entrepreneurship</span> Taking financial risks in the hope of profit

Entrepreneurship is the creation or extraction of economic value in ways that generally entail beyond the minimal amount of risk, and potentially involving values besides simply economic ones.

This article covers the best practices and needs for reform in entrepreneurship policies in Egypt.

Entrepreneurial finance is the study of value and resource allocation, applied to new ventures. It addresses key questions which challenge all entrepreneurs: how much money can and should be raised; when should it be raised and from whom; what is a reasonable valuation of the startup; and how should funding contracts and exit decisions be structured.

The term nano gap was coined by accounting firm Deloitte to describe the shortage of capital to fund the retirement of baby-boomer entrepreneurs seeking to sell their small, medium enterprises (SMEs). In the Deloitte report: "Micro-cap typically refers to those companies with an equity value of less than $250 million. Nano-cap is another term that is used to refer to companies with a value of less than $10 million."

The Industrial Development and Competitiveness Center is a Dominican corporation that serves as a regulatory and representative body of every project, plan and actions of the Industrial Sector of the Dominican Republic, with the goal of making it competitive.

Small and medium-sized enterprises are called as KOS or KOM in Azerbaijan. SMEs have a leading position in the provision of economic growth and employment in Azerbaijan.

References

  1. ↑ Kupferman, Martin (2002-12-23). "Savvy exit strategies for mid-sized companies". Journal of Corporate Accounting & Finance. 14 (2): 9–12. doi:10.1002/jcaf.10130. ISSN   1044-8136.
  2. ↑ Sharma, Pramodita; Chrisman, James J.; Chua, Jess H. (2003-03-01). "Succession Planning as Planned Behavior: Some Empirical Results". Family Business Review. 16: 1–15. doi:10.1111/j.1741-6248.2003.00001.x.
  3. ↑ Hawkey, John (2002). Exit Strategy Planning: Grooming Your Business for Sale Or Succession. Gower Publishing, Ltd. ISBN   978-0-566-08498-0.
  4. ↑ Kuhn, Robert Lawrence (1996). "Building Value into the Entrepreneurial Company". In Matthews, Jana (ed.). Leadership and Entrepreneurship: Personal and Organizational Development in Entrepreneurial Ventures. Greenwood Publishing Group. p. 127. ISBN   978-1-56720-043-0.
  5. ↑ Wall, John; Smith, Julian (1997-11-30). "Better Exits" (PDF). The Journal of Private Equity. 1 (2): 31–43. doi:10.3905/jpe.1997.409667. ISSN   1096-5572.
  6. ↑ Holaday, David W. (2006). "Exit Plans for Financed Life Insurance: Preparing to Cross That Bridger before Coming to It". Journal of Practical Estate Planning. 8: 15.
  7. ↑ Marks, Mitchell Lee; Vansteenkiste, Ronny (2008). "Preparing for organizational death: Proactive HR engagement in an organizational transition" (PDF). Human Resource Management. 47 (4): 809–827. doi:10.1002/hrm.20246. ISSN   0090-4848.
  8. ↑ Welbourne, Theresa M.; Pardo-Del-Val, Manuela (2009). "Relational Capital: Strategic Advantage for Small and Medium-Size Enterprises (SMEs) Through Negotiation and Collaboration". Group Decision and Negotiation. 18 (5): 483–497. doi:10.1007/s10726-008-9138-6.
  9. ↑ Lervik, Elisabeth (2006). Relational capital: A study on its importance, quantification and its impact on business sectors and markets (Masters thesis). University of Oslo. hdl:10852/17777.
  10. ↑ Susman, Gerald; Warren, Anthony; Ding, Min; Stites, Jenna P (2006). "Product and service innovation in small and medium-sized enterprises". Research Sponsored by United States Department of Commerce-The National Institute of Standards and Technology Manufacturing Extension Partnership. S2CID   212618078.
  11. ↑ Foster, Gregory L. "Estate Tax Issues for The Family Owned Business". fambusiness.org. Archived from the original on 2011-08-31. Retrieved 2019-09-24.
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