Recently I had the pleasure of partnering with David Coit, a Phoenix based banker from Bank of Arizona, to lead three Vistage groups through a case study in finance. With David functioning as the banker, Karie Montague, the Vistage Chair, serving as an advisor and me in the role of Chief Financial Officer (not a big stretch) we evaluated the recommendations of the groups. In the case study, a father had successfully owned and operated a company and then turned day to day operations over to his son and daughter. In two years, pretax earnings were down 90% and EBITDA margins had dropped from 13% to about 3%. The company had broken multiple lending covenants and was now preparing for a meeting to hopefully, avoid having the bank pull their line of credit. All the groups did a great job of identifying operating changes to raise cash and preserve their line but one big question was still there; what does the father really have in his business? Using some back of the envelope multiples the company appeared to be worth roughly $3 Million. With $2 Million in debt, if the father cashes out now, he is looking at about $1 Million. If he can get profitability back to where it was, he has the potential to pay off the debt and, using the same multiples, have a business worth $12 Million. This situation is a prime example of how critical exit planning or, as we call it, “Finding the Exit®” really is. The father in this case is now facing some big questions:
- Can we get the business back to where it was?
- Can the kids get things turned around?
- What role in the business should they take?
- Is it time to bring in outside management? If so how?
- How long will all this take?
Finding the right way to exit the business is a critical issue that all owners will face at some point. Doing it right can mean millions of dollars to an owner but it won’t happen quickly or without planning. My partners and I regularly help businesses through this process. We play a hands-on role guiding the company’s finances to maximize the value of the company. We also function as a partner by offering insight and options on succession planning, proper timing and deal structure as well as providing continuity for new owners whether they are family members, employees or outside parties. Finally a B2B CFO® serves as the owner’s “quarterback” by coordinating and aligning the attorneys, CPAs, investment bankers, insurance agents, investment counselors and other specialists that will be involved in a successful exit. So, the next time you’re thinking “What do I have in my business?”, give me a call and we’ll figure out what you have now and, more importantly, what it will take to get you to where you want to be.
Next week I’ll dive into another of the issues this business faces and talk about how to avoid costly mistakes along the way.