Several large banks have recently announced that they were either going to sell or exit businesses or geographies. The Royal Bank of Scotland (RBS) announced earlier in January that they planned to exit their cash equities business.
It’s being reported that Bank of America has told US regulators that they may exit some parts of the US market. The news is not only limited to the financial services sector. Esprit Holdings, a Hong Kong-based clothing retailer,
plans to close all their North American stores after failing to find a buyer for the assets.
While there are many reasons for exiting a business, a thoughtful strategy for executing the transition will not only increase the chance of success. It will also increase the value of the business being sold.
The benefits of proper exit planning include:
- Gaining control over how and when the exit of the business is conducted
- Giving dignity for stakeholders who are negatively affected by the exit
- Maximizing the value of the business
- Shortening due diligence and the transition period
- Having the luxury of multiple transition options to choose from
Develop a Comprehensive Exit Plan
A comprehensive exit plan includes many elements that address questions such as:
Exit objectives: What exactly does the management team hope to achieve by exiting the business?
Exit options: What are the various options for exit and what is the preferred option?
Valuation of the business: What does the management team consider a fair price for the business?
Stakeholder analysis: Who should be involved in the exit planning?
Determination of value drivers and cash flows: How can the business’s value be maximized in the short term to generate the best offers?
Implementation plan: What are the steps that need to be taken to sell or otherwise dispose of the business?
Set the Exit Objectives
The first step is to set the exit objectives. What does the management team want to achieve? The highest cash offer? The quickest sale?
The objectives will depend on the reasons why the company is exiting the business in the first place. Exiting the business because the parent is bleeding cash is a very different objective from exiting the business because the entity, no matter how profitable, simply no longer meets the strategic objectives of the parent company.
Determine the Exit Options
Next, engage a team of experts to help you develop a set of exit options. Depending on the size of your firm, there may be internal resources you can call on. Or you may need to hire external consultants. Typically, these experts would include a CPA, attorney, and appraiser. This might be one individual or a group of people.
Conduct a detailed analysis of your exit options, along with a rank-ordering of the options. These may include the sale of the business to a third party, an inside transfer of the business to a management team, or liquidation.
As you refine these options, you may have to conduct the next steps (valuation and stakeholder analysis) and come back to finalize the preferred option in order to have a complete picture.
Determine a value for the business
Use your team of experts to come up with a reasonable valuation of the business you are exiting. While there are a variety of approaches to utilize, the three main approaches are:
Income approach: Use your current income stream and a discount rate to determine the present value of that income stream. Discount rates used are typically related to the cost of capital (such as weighted average cost of capital or the use of a model such as the capital asset pricing model).
Asset approach: This determines the value of your business based on the assets on the balance sheet (inventory as well as plant, property, and equipment). The assets are adjusted to fair market value which means a valuation may need to be done on each asset class.
Market approach: This determines the value of the business based on other recent similar transactions (i.e. businesses that have been recently sold) that have occurred. This approach typically uses public information (such as stock price, earnings of public companies, sales, and revenues to find comparable companies).
As part of determining the value of your business, it is also important to consider what the optimal deal structure would look like. Is a cash sale preferred? Is a stock transfer acceptable? Determining the deal structure at this stage will provide guidance as to which type of buyer would be best for the business.
Conduct Stakeholder Analysis
As part of looking at what your business is worth, you should also conduct a stakeholder analysis. Be mindful not only of economic stakeholders, but social stakeholders as well. To name some groups:
- Staff
- Customers
- Shareholders
- Suppliers
- Business partners
- Local interest groups
- NGOs
- Media
- Trade unions
- Regulators
Consider mapping the stakeholders against a matrix of ‘Interest of Stakeholders’ and ‘Influence/Power of Stakeholders’ to determine how to appropriately work with and communicate with each of the stakeholder groups.
Summary
Exit planning can be a trying time for everyone involved and needs to be carefully managed. With proper planning, this can be achieved.
About the Author
Jonathan Collins writes the blog CFO Newsletter , where this article first appeared. He is a senior manager for KPMG China in Hong Kong. Combining a passion for finance and accounting, an enthusiasm for business improvement and deep experience in technology, Jonathan specializes in turnaround and improvement efforts for CFOs and CIOs. He can be reached at jonathan.collins@kpmg.com .
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