Exit Strategies

John had come to us with high expectations for the price he thought his company would sell for. He was certain of this because he had seen other companies sell for a similar multiple of gross revenue. However, what John had failed to understand was that buyers are only partly interested in top line revenue. More important to negotiating the selling price of most companies is the net cash flow the company produces. John's bottom line failed to live up to industry standards, which meant he wasn't likely to achieve the exit he had envisioned.

We have identified the top 12 principal reasons we've seen which have caused business owner transitions and exits to be unsuccessful. Each of these reasons impacts the company's ongoing annual profitability as well as an owner's transition and future exit results...

We weren't surprised by our meeting with Art. We had seen it many times before. Art and his son had founded and built a very successful retail business. They had operations across the country which were consistently producing significant year-to-year net cash flow. Art had decided recently that he was ready to sell the company and that he wanted to get this done right away.

However, as we began to visit, it was obvious Art had some roadblocks in his path that would take some time to overcome. He and his son clearly had significant differences about the future which Art was finding at this late date were becoming more and more difficult to resolve.

We have identified the top 12 principal reasons we've seen which have caused business owner transitions and exits to be unsuccessful...

Business cycles are the norm and while difficult to predict, peaks and valleys in our economy will always occur. However, the speed and magnitude of deterioration in worldwide business conditions and financial markets make the current recession especially severe. As everyone now knows, this is not a normal trough or business cycle; survival and success during these times will require extraordinary actions.

So what actions should restaurant companies consider to persevere in this extraordinary economic environment? The first critical point to remember is that "Fear is the Enemy." It is easy to become paralyzed by the current state of affairs and take no action, waiting and hoping that conditions will improve. Understandably, every company's situation is different and current actions will be dictated by individual circumstances...

We weren't surprised by our meeting with Art. We had seen it many times before. Art and his son had founded and built a very successful retail business. They had operations across the country which were consistently producing significant year-to-year net cash flow. Art had decided recently that he was ready to sell the Company and that he wanted to get this done right away.

However, as we began to visit, it was obvious Art had some roadblocks in his path that would take some time to overcome. He and his son clearly had significant differences about the future which Art was finding at this late date were becoming more and more difficult to resolve.

When franchise sellers seek exit strategies, they most often look to strategic buyers, other franchisees, their franchisor, or financial investors such as private equity as potential buyers for their businesses.

While these groups are often "top of mind" given their predominance of activity in the mergers and acquisitions marketplace, they do not represent the only opportunities for seller liquidity. Often overlooked is the company's existing management team or a key individual who may be qualified to complete a transaction while offering unique transaction structures to the selling parties.

More often than not, entrepreneurial sellers overlook their existing management team as a potential acquirer. Reasons for this range from capital resource issues to confidentiality...

Four ways to finance transactions in today's tight market
As a potential seller seeking a liquidity event, will the current credit markets prevent me from finding a buyer/investor at an acceptable valuation multiple? Are potential buyers/investors unwilling to pursue transactions in the present financing and economic environment?

These are common questions our clients have asked over the past several months. As we've predicted, 2008 has become a year of reduced activity and valuations in the M&A marketplace. Franchised and independent concepts are no exception, and have also become victims of deteriorating macro-economic and financing trends. Transaction counts and new unit development activity are down substantially from prior years, not to mention the significant lag in existing development schedules...

What a difference 12 months can make!One year ago, the debt markets were flush with cash, the merger and acquisition marketplace was lively with new deal announcements, and operating companies were aggressively pursuing new unit development opportunities. Today, we have a very different story, although an historically recurring one.

The challenges of the current consumer and capital market environments are new only to the youngest of industry participants. Collectively, how the overall market behaves under these circumstances will shape the pattern of the next cycle; but on a micro level, individual strategic decisions made today will separate the winners from the spectators.

First, what type of behavior are we experiencing in today's environment? Clearly, there are a number of opportunistic investors who are very active in today's environment...