Having An Exit Strategy Doesn’t Mean You Need To Exit
When we personally self-reflect we are the better for it. The thought process behind an exit strategy for your PEO is the equivalent to self-reflection on a personal level, but for your business.
In M&A and financial circles, you will often hear about the need for an exit strategy. However, if you are in a growth mode and not planning on selling your PEO, is an exit strategy necessary? I suggest that it is vitally important and today we’ll cover some of the reasons that brought me to this conclusion.
My firm, Business Resource Center, Inc., often works with PEOs and Private Equity fulfilling the role of industry expertise oversight during the due diligence process for M&A transactions. It is during these projects where we meticulously dissect a PEO’s financials, operating models and leadership infrastructure. A PEO leadership team that aptly knows their financials and can concisely define their operating model, stimulates confidence in the organization from a buyer’s perspective. While you may not be looking to sell your PEO, having the ability to explain your operations and illustrate how positive financial results are clearly a byproduct of the model execution is invaluable.
M&A isn’t a “smoke and mirrors” game as some might think. It is a methodical process of discovery and negotiation. A buyer is looking to make a purchase that over time will pay a healthy return on investment. The areas that will make your PEO more enticing for purchase are the same areas of focus that will help you grow, scale and improve your PEO’s bottom-line.
Question: if you had a 5 year exit strategy for your PEO, what would that look like? What would you want your PEO to achieve before that timeline eclipsed?
An Exit Strategy Can Help You Run A Better PEO
Putting an exit strategy in place creates an element of focus that will help drive growth and efficiency within your PEO and drive cash flow increase.
Think of it this way, if you were going to sell your house in 30 days, what would you want to do to spruce it up to get top dollar? Since we live in our houses every day, are there things that we may have grown accustomed to that we walk by every day and don’t even notice? If we decided to sell our house, these small areas in need of improvement become more glaring as we view it from a perspective of the buyer. Using this same strategy for your PEO can help you uncover areas that are not working optimally but have gone unnoticed because it meets minimum sufficiency. However, if we begin to attack these areas of improvement, we not only position our company for a greater sale value but also improve the organization in the present.
Using the house analogy, we improve our living situation so that we may enjoy the results before we ever sold the house. If we decided not to sell the house, no problem. We still made improvements that allows us benefit and if we ever decided to sell it, we’re prepared and in a better position than before.
Ultimately, having an exit strategy in place helps identify areas for improvement within our business models that may have previously gone unnoticed. When we look at our company from a buyer’s perspective, we use an objective vantage point to improve our operations. As a result, our company is the better for it. In addition to the benefits of our company improvements, an exit strategy also prepares our organization for sale if and when that day may come. Having your business prepared provides opportunity for gain if:
- An unforeseen circumstance arose that required an exit from the business
- If the market was yielding desirable multiples
- A strategic merger or acquisition positioned the organization’s future more favorably
Creating an exit strategy brings a level of objective thinking when we begin to view our PEO from a buyers perspective. A PEO that cannot stand alone and requires the owner’s day to day involvement can lessen your multiples at sale time or require you to remain with the company post transaction. The inability of the organization to stand alone also inhibits future ability to scale. The factors that make your company a more desirable purchase are the same that make your company a more profitable organization. Regardless if you plan on selling your company or not, having an exit strategy can improve your organization.