Client Background
In July of 2011, the owner of a specialty cable manufacturing company approached the IEPA to explore a possible exit from his business. 100% of the business was owned by Don Irving as a result of a partner buyout a number of years earlier. The Company had 55 employees and served a variety of markets with its specialized cabling including data communications, instrumentation, robotics, broadcast/studio, computer, utility, and factory automation. Organized as a C corporation, this company had 2013 annual revenues of approximately $18 million with a sizeable market share in its niche.
Client Issues
Don and his wife Karen had several goals for exiting their business. They wanted to work for ten more years, maintain their current lifestyle, reduce work hours, have more control over personal time, continue growing business, reduce the amount of money that goes to the government through gift and estate tax planning, and have personal freedom after a lifetime committed to building a successful business. Don later mentioned that it was the recent and unexpected passing of a good friend that was the primary motivation to begin and follow through on the business exit planning. Don wanted to enjoy the fruits of his labor and see if he and Karen could ‘stop and smell the roses’.
A full Exit Strategies Solutions Report was recommended to the owners. The final ESS report provided Don and Karen with ninety (90) pages of detailed analysis of their planning goal, the 6-step exit planning process, highlighted by each exit option available, and the after-tax analysis for a projected valuation for each form of transfer to measure the closing of the owner’s personal value gap (i.e. what was needed from the business to meet the couple’s personal financial goals). The owners’ value gap turned out to be an immediate issue. Like many owners, most of this couple’s money was tied up in their illiquid business, to the detriment of their personal savings and financial security. The partner buyout referenced above was also a reason for excess cash being unavailable for personal savings.
Planning Solutions/ Personal
The catch to this case was that Don and Karen owned a plot of land that was being courted by a major national grocery store to establish a footprint in their town. The national chain was willing to enter into a very lucrative, long-term lease agreement if, and only if, Don and Karen could deliver the land ‘build ready’, permits and all. So, from the time the exit planning ended to when Don and Karen re-engaged was approximately eighteen (18) months. Once the grocery store had what they needed, the construction began and our exit plan was updated to include the lease payments which provided a steady income to substantially reduce the personal value gap and make consideration of various exit options more viable.
Having addressed the ‘financial readiness’ of the owners, we moved to Don’s mental readiness for an exit, which was low – Don very much enjoyed running his company, but he knew that greater growth was available and that he was a bottleneck at the company because he was involved in the day-to-day running of the business and there was no successor in place to lead the company in Don’s absence. As a result of the planning, including many hours of conversation and ‘soul searching’, Don took a courageous step in the right direction by hiring a COO to take over most of the day-to-day duties that he had been assuming for years. Personal freedom started to become real for Don now that he had a reliable operating officer and his personal, financial situation was improved with the rental/lease payments.
Exit Option Analysis
Now, a number of years had gone by, but we returned to the exit plan to further engage in discussion and detailed analysis regarding which exit option would work best for this couple and their post-exit goals. Of the exit, options presented the three (3) that best fit was (i) a sale to an outside buyer, (ii) a management buyout (MBO), and (iii) an employee stock ownership plan (ESOP). The IEPA analyzed the internal transfers through a series of special reports and detailed discussions. IEPA staff facilitated discussions with certain key employees, including a number of candidates that Don felt, were qualified to run the company as CEO in his absence. The analysis and engagement helped Don and Karen to truly envision how the business may run without Don’s active, daily involvement.
Also heavily considered was an Employee Stock Ownership Plan (“ESOP”) for Data Guide to allow Don and Karen to monetize their ownership and give the leadership team and employees an opportunity to participate in the company’s value. Don and Karen absorbed the complex details of the ESOP in serious contemplation of making this exit path their chosen option. While considering the ESOP, the conversations continued about replacing Don as the leader because the ESOP would not solve for the lack of a successor to perform Don’s tasks at the company. However, while all of this was happening, a customer of Data Guide had approached Don about selling the business to them.
Transaction details / Outcome
The rationale for the large customer buying the company was that they could ‘in-source’ the production of the irreplaceable cabling that Data Guide provided to them. This vertical integration of the company’s supplier would ensure the availability of their supply but also allow them to control the process, capture the margin that Data Guide enjoyed, and innovate with new products for their customers.
In late 2014, the customer tendered an Indication of Interest, with an attractive, overall valuation for a purchase of 100% of the Company. The deal was structured as a combination of cash at close as well as a promissory note to be paid in four (4) equal, annual installments. The total valuation offered was not only above the high-end of the range of values from the exit plan but is also allowed Don and Karen to successfully exit their business and maintain their ideal lifestyle in retirement, as carefully measured [and updated over the years] in the plan.
In the end, Don and Karen were able the accept to offer and sell the business to the large customer. As a result of the exit planning, the owners took a multi-year journey to ‘put the pieces together’ to make a successful exit work. And, because of the hard work and time put into the planning process, when the ‘right’ offer came along – the offer that not only provided value for Don and Karen but also took care of the employees that they cared so much about – they were in a position to accept the offer and complete their business exit.
Today Don and Karen are ‘snow birds’, enjoying their winters in Florida and summers in New England. Don recently wrote, ‘I’m in the process of doing an autobiography for my great-grandkids and future family members. There will be a section on [how The IEPA and the exit planning process] prepared us to exit gracefully’.