Exit Terms & Concepts to know
Exit Terms & Concepts to Know
- Exit Plan: Strategic framework for business divestiture
- Exit Mindset: Mental preparation for business transition
- Types of Sale to Avoid: Fire Sales.
- Types of Income: Fixed versus Variable compensation structures
- Types of Sales: Different transaction structures including Acquisition, Acqui-hire, and Management Buy-Out (MBO)
- Due Diligence: Comprehensive investigation process
- Methods of Exit Agreement: Including Purchase Sale Agreement (PSA) and Installment Sale Agreement
- Types of Payment: Various compensation methods
- Valuation Methods: Including Multiples and EBITDA & Owner Replacement Value
- Asset Viability Test (AVT): Framework for assessing business sustainability
- Decision Fatigue: Degradation of decision quality over extended periods
- Expansive Time Fallacy: Misconception about future time availability
- Future Buyer, Killing Your Darlings & Leverage: Strategic positioning concepts
- MAYA Principle & Parkinson’s Law: Business psychology frameworks
- Wealth Quotient Value (WQV): Personal wealth measurement methodology
Exit Plan =
#ExitNumber ($) + #ExitDate (DD/MM/YR).
Exit Number is the monetary number ($) that you will sell your interest to another person or entity.
Exit Date is the Date YOU as company owner will leave your company.
Exit Number
The monetary value at which you sell your interest.
Exit Date
The specific date you plan to leave your company.
Exit Mindset
Exit Mindset is where every act/creation/partnership goes towards your actual Exit Plan.
Every Act
Each action contributes to the exit plan.
Every Creation
All new developments align with the exit strategy.
3 Every Partnership
Collaborations are formed with the exit in mind.
TYPE OF SALE to AVOID:
Fire Sales
Fire Sales happen when the Seller wants to sell the company at whatever minimum cost to a Buyer as if it’s on “fire” and needs to be unloaded quickly.
Urgency
Seller needs to unload quickly.
Minimum Cost
Company sold at the lowest possible price.
Types of Income: Fixed v. Variable
Fixed Income
Usually guaranteed payments on a monthly or quarterly timed schedule. There is an underlying, recurring revenue contract upholding this income stream. Predictability of payments is paramount. Your client’s LTV (Lifetime Value) is expanded once a product/service resulting in fixed income is introduced.
Variable Income
One-off events, products or services. Due to market trends, inflation, customer preferences – these factors can have a detrimental effect on the scalability of the variable income of your business. Your client’s TV (Transactional Value) is limited to the cost of that singular product.
Types of Sales
Acquisition:
A company or entity completely buys an asset or another company. Different than Mergers where 2 companies become one and both Seller and Buyer still have access to the new, merged company. In an Acquisition, Buyer usually acquires the whole Company or Asset outright. Seller loses ownership and access to the asset or company upon sale.
Merger:
When two companies combine their strengths to create a stronger entity with shared vision and new opportunities.
Company A
Established in 2005
Market leader in technology
1000+ employees
MERGER
Combining strengths
Shared vision
New opportunities
Company B
Established in 2010
Innovative solutions provider
500+ employees
Aqui-hire & Management Buy-Out (MBO):
Aqui-hire
A Buyer comes and buys ONLY the Labor contracts of the Selling Company in an Asset Sale (Buy just the employment contract assets) or Purchase Sale Agreement (Buy company and contract assets). Basically, no (or little) other assets are sold in this sale other than the Employment contracts. The Seller can keep the remaining company (if there's other assets to keep it afloat), or dissolve it.
Management Buy-Out (MBO)
The exit method of Management Buy-Out is when the Buyer(s) are ALREADY within the Seller's company. The existing management or employees pool their resources and cash to buy out the current CEO's stock and ownership. CEO is then exited with no further ownership or leadership of the company.
Exit Process Term:
Due Diligence
1
Agreement on Terms
Buyer and Seller finalize initial terms.
2
Sale Continuation
Sale proceeds if due diligence is satisfactory.
3
Verification Period
Buyer verifies assets and financials.
Method of Exit Agreement
Asset Sale Agreement (ASA):
An Asset Sale Agreement (ASA) is one of the methods of buying a company (the other is Purchase Sale Agreement – PSA). In this method, the Buyer only buys the Assets of the Company (Inventory, Equipment, IP, customer lists, websites etc), NOT the Company Stock/Equity and the Assets. Seller keeps the Company Stock/Equity after the Sale, sometimes, with no assets left. Ex: Buyer-Lamps LLC did an Asset Sale Agreement for the entire inventory of lamps of Seller-Shades & Blinds Inc.
Buyer Buys Assets Only
Inventory, Equipment, IP, customer lists, websites, etc.
Seller Retains Stock/Equity
Company stock/equity remains with the seller.
Purchase Sale Agreement (PSA):
A Purchase Sale Agreement (PSA) is one of the methods of buying a company (the other is Asset Sale Agreement – ASA). In this method, the Buyer buys the Assets of the Company (Inventory, Equipment, IP, customer lists, websites etc), AND the Company stock/equity altogether in one transaction. Seller usually doesn’t keep ANY of the Company Stock/Equity after the Sale. Ex: Buyer-Lamps LLC did a Purchase Sale Agreement for the entire assets and stock of Blinds Inc.
Buyer Buys Assets and Stock
Inventory, Equipment, IP, customer lists, websites, and company stock/equity.
Seller Relinquishes All Ownership
Seller typically retains no company stock/equity after the sale.
Installment Sale Agreement:
Scheduled Payments
Payments made over a period of time.
100% Ownership
Buyer gains full ownership on sale date.
Type of Payment
Earnout:
Milestone-Based Payments
Additional payments contingent on meeting specific goals.
Post-Sale Payments
Earnout amount paid after the sale date.
Full Ownership
Buyer retains 100% ownership from sale date.
Type of Valuation Methods:
Book Value
This is one of the types of Valuation Methods utilized by both Buyers and Sellers to determine the actual value of a company or asset. Book value means "balance sheet" value. What's listed as the exact value on the balance sheet of the company. THIS valuation method is the most accepted valuation method...simply because numbers don't lie. Ex: Lamps LLC had a book value of $5,000,000 but wanted to sell for $6,500,000. Blinds R Us, Inc., preferred to buy at the book value so paid $5,000,000 instead.
FMV: FAIR MARKET VALUE (FMV)
This is one of the types of Valuation Methods utilized by both Buyers and Sellers to determine the actual value of a company or asset. Fair market value means "similarly situated" value. THIS valuation method is the most coveted valuation method...by Sellers, simply because it could include such "gray areas" as non-compete provisions, goodwill, social media following (all the intangible, unquantifiable assets). Ex: Lamps LLC had a book value of $5,000,000 but wanted to sell for the FMV of $6,500,000. Blinds R Us, Inc., appreciated the goodwill value so paid the FMV instead.
Multiples:
2x
Revenue Multiple
Commonly used in valuations.
5x
PEBITDA Multiple
Reflects profitability.
10x
SaaS Multiple
High growth potential.
EBITDA & Owner Replacement Value:
EBITDA:
A company's Earnings Before Interest, Taxes, Depreciation, and Amortization (commonly abbreviated EBITDA - it is a measure of a company's profitability of the operating business only), thus before any effects of indebtedness, state-mandated payments, and costs required to maintain its asset base.
Ex: Buyer will want to know Seller's EBITDA to determine financial and overall value than cash profits alone (Forbes, 2021).
Owner Replacement Value (ORV)
Owner Replacement Value (ORV) represents the estimated cost to replace the owner's role and responsibilities within the company. This includes the owner's unique skills, knowledge, relationships, and day-to-day management of the business.
Calculating ORV is important because it helps determine the true value of the business beyond just its financial assets. The new owner will need to factor in the cost of hiring and training personnel to fulfill the owner's functions. By accounting for ORV, the business can be properly valued and positioned for a successful transition.
Understanding ORV is especially crucial for business owners who play a central, irreplaceable role in the company's operations. Properly quantifying this "owner premium" ensures the business is not undervalued during the exit process.
Concepts to Know:
Remaining Alpha:
Remember, you as CEO of your company are always Alpha. Not your customers. It's a symbiotic relationship where you listen and understand trends, but you can dictate HOW and WHERE your company's products and services are received by those customers.
AVT (Asset Viability Test)
- How does the new asset fit into my company portfolio? (Does it represent your current or future brand?)
- What’s the purpose of the transaction? (To buy and hold, or to be revenue-generating from Day 1)
- How will it add value (Revenue/Profit) on Day 1 and Year 2, 3, 4, 5?
- How will this assets “work” with my other assets? (Is it complementary or competitive?).
- What is the new asset’s “exit plan”?
Portfolio Fit
Does it align with your brand?
Transaction Purpose
Buy and hold, or revenue-generating?
Value Addition
Revenue/Profit on Day 1 and beyond?
Asset Synergy
Complementary or competitive?
New Asset's Exit Plan
What's the long-term strategy?
Decision Fatigue & Expansive Time Fallacy
Critical concepts that impact a CEO’s decision-making and exit planning:
Decision Fatigue (DF)
Simply put, DF occurs when there are so many decisions to be made, and questions to be answered over a protracted period of time, that people lose the initial momentum and energy. Their decision-making skills suffer and standards drop.
Expansive Time Fallacy (ETF)
You believe you WILL have all the time in the world to deploy or engage a particular strategy/product or plan of action, based on your CURRENT time/energy output.
ETF is highly seductive to an optimistic CEO, who actually believes that they WILL have the time to act in the future. This is a true Fallacy because we legitimately know that time and energy are depreciating Assets for CEO's. We regularly make FUTURE decisions based on our PRESENT assessment of our CURRENT time and energy.
How to AVOID Expansive Time Fallacy (PROACTIVE)
- Think of the Plan/Strategy/Action.
- Date of potential deployment of Plan/Strategy/Action.
- What actions will have to happen before that happens?
- Will you, as CEO, be the person to lead that initiative?
- What else is going on around your life around that time? Family requirements? Other initiatives?
- "Name your 2nd" who will be your co-pilot.
- Plan through different "what if" scenarios that could derail this Plan.
Exit Litmus Test
Regularly evaluate your exit strategy to ensure alignment with your personal and financial goals.
6-Month Review Cycle
Conduct a balanced test for your Exit Date & Exit Number every six (6) months to maintain strategic alignment.
Wealth Quotient Value (WQV) (see below)
Apply your Wealth Quotient Test to determine HOW the sale/exit of your company will enhance your overall life quality.
Strategic Alignment
Ensure your exit timeline and financial targets align with your broader wealth and lifestyle objectives.
Future Buyer & Killing Your Darlings & Leverage
Future buyer:
The second “buyer” for your company (first is your current consumer). Can be from current partnerships, referral partners, even from COMPETITORS.
“Killing your darlings”
is a curation concept used by writers, CEOs, and artists to curate a body of work or unfulfilling paths. It literally means cutting something out, EVEN IF YOU DEARLY LOVE IT because it is NOT PRODUCTIVE to your end goal or vision. When you curate and cut consistently, you are creating micro “exits” each time.
Leverage:
Leverage comes when you work your relationships and are able to be of service. The ability to be in a room and work your magic. Work your story. The ability to meet people who know other people and can connect you, remember you. These relationships take time; take service and continuous connection. While you may be building your future exit; you’re also building your future buyer list everyday. Ownership is the stock or percentage that you own in the actual company. Leadership is the management or day to day stewardship of your company.
"Killing Your Darlings"
Cutting unproductive elements for your end goal.
Leverage
Working relationships to be of service and connect with others.
MAYA Principle & Parkinson's Law
MAYA principle:
MAYA - Most Advanced, Yet Acceptable: To sell something surprising, make it familiar; and to sell something familiar, make it surprising.* This concept of MAYA is an extension of exposure theory. (In psychology, trauma victims are continually exposed to triggers of their trauma to desensitize the magnitude and importance of that experience.)
Parkinson's Law:
Work expands to fill the available time.
Riptide Mentality (REACTIVE):
Commonly called the Riptide Mentality; this is a reactive method to calmly and non-reactively respond to current events AS THEY ARE.
Wealth Quotient Value (WQV) & Wealth Quotient Test (WQT)
Wealth Quotient Value (WQV):
Wealth Quotient Test (WQT):
When faced with a decision - ask yourself if your decision will increase or decrease your WQV. Adjust accordingly.
| Example Definitions of Wealth | Possible Impact on Wealth Quotient Value (WQV) |
|---|---|
| Optimal physical health | Increase |
| Mental peace and clarity | Increase |
| Leverage in business and life | Increase |
| Access to fine dining, clothes, vehicles, material life | Increase/Decrease (depends on balance) |
| Strong shelter, furnished home | Increase |
| Tight-knit community | Increase |
| Solid, fulfilling relationships | Increase |
| Choices and independence | Increase |
| Time abundance | Increase |
