Value Creation and Exit Strategies

Value creation is the bridge to your exit strategy. Done correctly, it can mean that you have created the maximum value for the shareholders when the time comes to exit. Done incorrectly, could mean that the shareholders leave "money on the table" or worse yet a buyer cannot be found. The "Value Creation Strategies" (Link to H3 Value Creation Strategies) "and "Exit Strategies" (Link to H3 Exit Strategies) are inextricably linked to wealth creation.

GEM Strategy Management consultants examine potential value creating strategies through its Strategic Business Planning Processes and its Growth and Expansion Strategy processes to identify value creation opportunities. Some value creation strategies could be considered:

Value Creation Strategies

Corporate Separations

Recent separations have addressed value creation through optimizing asset mix, capital structure or earnings and cashflows. For example, companies facing these kinds of situations could be candidates for corporate separations.
Companies facing persistent undervaluation of segments or subsidiaries or substantial discount to the "sum–of–the–parts":
• Operations of a subsidiary are non-core and have limited synergies
• Management of the combined company is a drain on management time and resources
• Earnings/Cash flow of the parent/subsidiary is a drag on the other
• Capital Structure is sub-optimal for the subsidiary
• Brand/Image/Reputation considerations

The tactical decision regarding separation must balance some financial and operational goals. These goals include: enhancing strategic focus; optimizing capital structure, tax efficiency and earning profiles and realizing value enhancement.

Segmenting Cash Flows

Some public companies have pursued carve-outs of a target portfolio of cash generating assets. These range from midstream pipeline and shipping Master Limited Partnerships (MLPs) to power generation assets offering a substantial yield to shareholders. In each of these situations, a large public company targeted a group of new investors attracted to tax-efficient cashflows with long duration profiles, creating significant value for shareholders.

Sale and Lease Back of Embedded Assets

Companies may find that they have embedded assets that are undervalued such as real estate, plant and equipment or technology that could be sold and then lease back could improve the balance sheet and retained earnings.

Reverse Merger with a Public Shell

This strategy can create significant value for the shareholders in the following ways:
• Increased Valuation: Typically publicly traded companies enjoy substantially higher valuations than private companies
• Capital Formation: Raising capital is usually easier because of the added liquidity for the investors, and it often takes less time and expense to complete an offering
• Acquisitions: Making acquisitions with public stock is often easier and less expensive
• Incentives: Stock options or stock incentives can be useful in attracting management and retaining valuable employees
• Financial Planning: Public company stock is often easier to use in estate planning for the principals. Public stock can provide a long term exit strategy for the founders
• Reduced Costs: The costs are significantly less than the costs required for an initial public offering
• Reduced Time: The time frame requisite to securing public listing is considerably less than that for an IPO
• Reduced Risk: Additional risk is involved in an IPO in that the IPO may be withdrawn due to an unstable market condition even after most of the up-front costs have been expended
• Reduced Management Time: Traditional IPOs require greater attention from senior management
• Reduced Business Requirements: While an IPO requires a relatively long and stable earnings history, the lack of an earnings history does not normally keep a privately held company from completing a reverse merger
• Reduced Dilution: There is less dilution of ownership control, compared to a traditional IPO
• Reduced Underwriter Requirements: No underwriter is needed: (a significant factor to consider given the difficulty companies face in attracting an investment banking firm to commit to an offering.)

Bilateral or Constellation Alliances

Becoming part of a bi-lateral alliance or an alliance constellation, like the airline industry's Star Alliance, can help a company compete and win. Companies can compete-and win-by using a constellation of allied firms. We define a constellation as a set of firms, linked through alliances:
• Linking Markets: Companies sometimes form constellations to connect local markets and, in the process, provide customers with broader geographic coverage
• Combining Skills: Companies also form constellations to assemble a diverse basket of skills, sometimes to launch a new business
• Building Momentum: Constellations are also used to create market momentum - that is, to persuade customers, suppliers, or competitors to adopt a new technology or business protocol
• Reducing Costs: On occasion, companies form constellations to reduce costs
• Sharing Risk: Companies also assemble multiple partners to share large investments or risks

Acquisitions

Smart deal making is at the heart of many successful companies. So, what separates the successful and unsuccessful dealmakers? The less-initiated execute a series of small, low-risk deals rather than attempting to pull off complex acquisitions. In this way, great dealmakers sharpen their skills at acquiring and integrating companies, gradually scaling up to larger deals and institutionalizing a success formula. Smart dealmakers also focus on the critical decisions that make or break a deal, so they don't have to waste time on excessive number-crunching or inch-by-inch integration. They follow four key imperatives:
• Targeting deals according to a sound investment thesis
• Determining which deals to close by asking and answering the big questions
• Prioritizing which aspects of the businesses to integrate and which to leave independent
• Developing contingency plans for when deals inevitably go off track

Exit Strategies

Research indicates that 80% of those with a net worth of $5 million or more are entrepreneurs who sold their businesses. Yes, real wealth is not made simply by starting companies or growing companies. Real wealth is made by selling your company. And particularly, selling to an acquirer who will pay a premium because it believes it can generate even more value from what you've built. However, the premium paid for any company is based on the "value created" by the existing shareholders over time as previously discussed.

To attract an investor for your business, (whether it is growth capital or a sale), it is important to plan and prepare for 12 to 24 months (and sometimes longer) ahead of going to the investor market place. There are four “Knows” that are critical to the success of attracting investors:
• Know Your Industry
• Know Your Company
• Know Your People
• Know to Plan and Prepare for the Investor

In the last two years, the “buyers” market has become much more robust due to two major drivers. The stock market has been robust enriching buyers’ net worths, and buyers are looking to accelerate their growth through acquisitions. Buyers typically fall into two general categories:
• Strategic
• Financial

You need to prepare for both. Each will have a different focus and therefore will affect the deal structure. Depending on the investor, there are some exit plans to consider. Regardless, when preparing to execute an exit strategy, careful planning is critical to ensure, that the transaction and post-transaction go smoothly. Planning for the transaction takes in four broad areas:
• Valuation of the Business
• Clean Audited Financial Statements and Realistic Projections
• Tax and Legal Considerations and Analysis
• Wealth Management Planning

In addition to our network of senior consultants, we partner with some of the leading law firms, accounting firms, investment banking firms and wealth planning firms in the U.S. We select the right firm (s), form a team that has the subject matter expertise and depth of experience needed to provide our privately held clients with the most up-to-date expert advice when preparing and executing an “Exit Strategy.”

IPO's

Many privately held company owners and shareholders believe that an IPO is their best avenue for value creation and an exit strategy for themselves. And in some cases, they may be right.

So why do so many private companies want go public? Going public can raise lots of cash. Being publicly traded also opens many financial doors:
• Because of the increased scrutiny, public companies can usually get better rates when they issue debt
• As long as there is market demand, a public company can always issue more stock. Thus, mergers and acquisitions are easier to do because the stock can be issued as part of the deal
• Trading in the open markets means liquidity. This makes it possible to implement things like employee stock ownership plans, which help to attract top talent
• Being on a major stock exchange carries a considerable amount of prestige
• It is one of the best avenues for issuing a secondary offering

In the past, only private companies with strong fundamentals could qualify for an IPO, and it wasn't easy to get listed. The internet boom changed all this.

Firms no longer needed strong financials and a solid history to go public. Instead, IPOs were done by smaller startups seeking to expand their businesses. There's nothing wrong with wanting to expand, but most of these firms had never made a profit and didn't plan on being profitable anytime soon. Founded on venture capital funding, they spent like Texans trying to generate enough excitement to make it to the market before burning through all their cash. In cases like this, companies might be suspected of doing an IPO just to make the founders rich. This is known as an exit strategy, implying that there's no desire to stick around and create value for shareholders. The IPO then becomes the end of the road rather than the beginning.

There are other opportunities for creating value including Spin-Offs, Spit-Offs, Carve-Out IPOs Equity Carve-Out and Tracking Stocks.

As you can see, there are many Value Creation Strategies that can be used to reach your valuation goals. We can help you evaluate which of the Value Creation Strategies is right for you.

Venture Capital

These investors look for a high return and an exit strategy of approximately 3-7 years. They work almost exclusively with companies that may go public or can be sold for a significant profit. However, keep in mind that going public is very rare and is unattainable for most small or smaller middle market companies.

Other Possible Exit Strategies to Consider:
• Merger
• Management Buy-out with Cash and an Earn out
• Sell to Private Equity Firm or Investment Banking Firm
• Buyout by Partner in Business
• ESOP
• Franchise the Business
• Hand down the Business to Another Family Member

Exit Strategies for Long-Term Involvement for Small to Small Middle Market Companies:
• Let it run dry: This can work especially well in small businesses like sole proprietorships. In the years before you plan to exit, increase your salary and pay yourself bonuses. Make sure you are on track to settle any remaining debt, and then you can simply close the doors and liquidate any remaining assets. With the larger income, naturally, comes a larger tax liability.
• Sell your shares: This works particularly well in partnerships such as law and medical practices. When you are ready to retire, you can sell your equity to the existing partners, or to a new employee who is eligible for partnership. This can be structured on an "earn-out" basis for a three to 10 year period. You leave the firm cleanly, plus you gain the earnings from the sale.
• Liquidate: Sell everything at market value and use the revenue to pay off any remaining debt. This is a simple approach, but also likely to reap the least revenue. Since you are simply matching your assets with buyers, you probably will be eager to sell and therefore at a disadvantage when negotiating.

Exit Strategies for Short-Term Involvement
• Go public: The dot-com boom and bust reminded every one of the potential hazards of the stock market. While you may be sitting on the next Google, IPOs take much time to prepare and can cost anywhere from several hundred thousand to several million dollars, depending on the exchange and the size of the offering. However, the costs can often be covered by intermediate funding rounds.
• Merge: Sometimes, two businesses can create more value as one company. If you believe such an opportunity exists for your firm, then a merger may be your ticket to exit. If you're looking to leave entirely, then the merger would likely call for the head of the other involved company to stay on. If you don't want to relinquish all involvement, consider staying on in an advisory role.
• Be acquired: Other companies might want to acquire your business and keep its value for themselves. Make sure the offered sale price meshes with your business valuation. You may even seek to cultivate potential acquirers by courting companies you think would benefit from such a deal. If you choose your acquirer wisely, the value of your business can far exceed what you might otherwise earn in a sale.
• Sell: Selling outright can also allow for an easy exit. If you wish, you can take the money from the sale and sever yourself from the company. You may also negotiate for equity in the buying company, allowing you to earn dividends afterward — it is in your interest to ensure your firm is a good fit for the buyer and therefore more likely to prosper.

Value Creation & Exit Strategy Skill Sets

Value Creation Strategies
• Deal Structuring and Negotiation
• Due Diligence
• Capital Formation and Restructuring
• Preparing Companies for Sale or Attracting Growth Capital
• Divestures and Dispositions
• Transaction Execution
• Joint Ventures and Alliances
• Two Stage Auction Process
• Separation of Assets (IP, Real Estate, Plant and Equipment)
• Asset Sales
• Stock Sales

Exit Strategies
• Venture Capital Firms
• Private Equity Firms
• Long–Term Exit Strategies
• Short–Term Exit Strategies
• Mergers
• Sell to Private or Public Company