Planning a proper exit

Anticipating her 70th and his 78th birthdays, Elaine and Francis McGillicuddy decided last winter that "we had done it long enough;" it was time to shed the daily responsibility of running their beloved Portland Yoga Studio. While they wanted a profitable sale of her business, just as important to the McGillicuddys was placing their business in capable, caring hands to secure its future. However, the prospective buyers they thought most capable were hesitant to incur debt to finance the purchase.

What kind of sale could the McGillicuddys craft to insure that Portland Yoga Studio went to buyers who could continue the spirit and quality of their 16 year old business, and at the same time, meet their retirement needs?

The McGillicuddy's dilemma, which they happily solved, is a prime example of why a well crafted exit plan is essential, and as the McGillicuddys learned, is something that business owners should be thinking about from day one.

"It's important for a business to think well in advance about its exit strategy," according to Brian Burwell, a certified business counselor at the Maine Small Business Development Center's Portland Service Center at the University of Southern Maine. Burwell worked with the McGillicuddys to craft the exit strategy that solved their dilemma. "We do see people in crisis with no exit strategy and while their companies probably have some value," says Burwell, "they are so emotionally exhausted, they don't have the energy to go out and find buyers and put together proposals."

Elaine McGillicuddy says that because Portland Yoga Studio was not her family's primary source of income, they re-invested revenues into training, teacher bonuses, equipping the studio, extra advertising and other discretionary expenses. As a result, their business didn't look as profitable as it might have. This made prospective buyers and lenders more cautious. "We had to sit down and detail exactly what was discretionary expense that a new owner would not have to incur," says Elaine McGillicuddy.

While their spending choices gave them the business experience they wanted, Elaine McGillicuddy says "We have to admit that it was not wise financially in terms of a sale."

The solution? "Brian helped us create a complex 'earn out' formula," says Elaine McGillicuddy about the sale of one of her two Portland Yoga Studio locations. Through the earn out, the McGillicuddys earn a portion of the business' future profits over the next few years.

In the sale of the second Portland Yoga Studio location, now called the Yarmouth Yoga Studio, they crafted a purchase/sales agreement that included an owner-financing option.

In both cases, the McGillicuddys fulfilled their goal of finding owners, including their former office administrator and a longtime Portland Yoga instructor, who feel passionate about the business. In addition, under her exit plan, Elaine McGillicuddy continues to teach Portland Yoga Studio classes.

According to Burwell, for businesses like a restaurant, a retail operation or a yoga studio, the company's value is based on its historic as well as the anticipated earnings. "So it's very important to get them profitable prior to any sale," he says.

For other businesses, such as an emerging technology company, showing a profit is not critical at the time of sale. "The exit strategy of such a company is to get it to a stage where the owners can sell the technology to a larger player." At that point, hopefully, the profit is earned.

Burwell says many options exist for exiting a business and exploring them thoroughly can pay off. For example, he tells the story of a client whose business functioned as a "middle man" within a significant industry in Maine. When the business environment shifted suddenly, his role was essentially eliminated.

At first the business owner thought his only option was to close the company and liquidate his equipment. Burwell, along with another Maine SBDC counselor, a former business broker, helped the client understand the value of his company. Together the two counselors encouraged their client to contact larger industry players who might have an interest in his company's customer base and operations, including several experienced employees. The business owner contacted key players in the industry, whom he knew, and found a buyer.

One scenario that always requires a sound exit plan be developed up front is when a company is looking for investors. "It is usually in the exit process," says Burwell, "that those investors realize the return on their investments."

Other scenarios where an exit plan is critical include a family business or when there are multiple business partners. Significant delays in decision-making at the time of crisis such as illness or death, or even when a partner wants to leave, can jeopardize a business' survival.

"Frankly", says Burwell, "all businesses should have an exit strategy almost right from the start - even sole-proprietors." Burwell suggests business owners talk to their accountants or a Maine SBDC business counselor to develop an exit plan., and then keep it up to date.

Planning ahead can include making rudimentary changes that build the value of the company at the time of exit. Five years ago, when Elaine first entertained retiring, she and her husband modernized their record-keeping and other office practices so that she could hire an administrator to free some of her time and also make sure their records were orderly and understandable. That interim step provided the McGillicuddys important preparation time and materials for their eventual exit.

"The point is," says the newly semi-retired Elaine McGillicuddy, "it is good to organize on a sound business basis from the beginning" and right onto an exit.

Katherine Arno is the Director of Training and Communications for the Maine Small Business Development Centers (www.mainesbdc.org) in its Portland center at the University of Southern Maine. Kate owned her own small business in Maine for eight years. Today, aside from working with small business issues at Maine SBDC, she helps her husband with the small business that he has owned in Freeport for 12 years. She can be reached at Karno@maine.edu.

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