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For many business owners and executives at small and emerging growth companies, the day-to-day activities of creating, establishing and running a company often distract them from something extremely important: identifying their exit strategy.

Planning an exit strategy can be easy to disregard. For a business owner or investor looking to get a return on their investment, not planning an exit strategy can create enormous and financially-devastating repercussions.

ACG National Capital recently held an Emerging Growth Roundtable featuring a diverse panel of experts, including: Frank Mellon, Attorney at Enterprise Business Law Group; Cameron Hamilton, Principal at The McLean Group; and Judy York, CEO of former NETCONN Solutions. This roundtable event was designed to provide executives at small and emerging growth companies with quality insights for building value and creating an exit strategy.

Here are some of the things executives need to think about when identifying and navigating an exit strategy:

  • Set up the right structure – Setting up the right structure for your company from the start is important for both the buyer and the seller. For buyers, both S-corporations and LLC’s are very attractive since the buyer is able to effectively purchase assets for tax purposes. Also, for a buyer, an asset purchase amortized over 15 years provides a step-up in tax basis and intangibles, including goodwill.  This setup is especially valuable in the government contracting industry where buyers can avoid having to go through the novation process for non set-aside contracts.
  • Build corporate value – Panelist Cameron Hamilton, Principal of the McLean Group, provided examples on value drivers for businesses, which included both qualitative and quantitative components.  Quantitative factors are drivers behind determining base value, e.g., return on investment/cash flow, and determines whether a company is in the game or not. Qualitative drivers, on the other hand, change the barrier to entry while driving the multiplier paid and changes the risk profile of the transaction package.
  • Identify a retention plan – Failure to convince buyers that personnel will stay, as Cameron noted, can be a surefire way to kill a deal. Retaining key employees from a seller’s stance is also critical, as there must be plans in place to properly integrate staff through the exit process. There must be a retention plan in place, especially for key managers.
  • Surround yourself with good people and measure – Exit options can vary with a company’s structure and time line. It’s best to get accounting advisors to address your specific situation and options, as well as have access to proper attorneys and good relationships with investment bankers. Also, scheduling audits, and having checklists and goals in place on areas of growth, retention and SAR’s can be good methods to employ, as these tactics can hold everyone accountable to a strategic growth plan.

Having an exit strategy could be very important for small companies in a number of hot industries right now. Large government contractors and other companies are looking to make strategic acquisitions in a number of markets, including: cybersecurity, health care IT, cloud, alternative energy and geospatial analysis. If your company is in one of these hot markets, it may be time to start giving your exit strategy a hard look.

Planning and incorporating an exit strategy is a critical component for any company. By putting aside the day-to-day and establishing a strategy in advance, companies can keep their options open and position themselves to be of greater value.

If you’re interested in attending the next Emerging Growth Business Roundtable on May 7 discussing Executive Compensation, please register at the ACG National Capital Web site.