Selling a Business Under Stress
A featured article by Sarah Goodman in the Customized Logistics and Delivery Association (CLDA)’s summer issue of their industry magazine. This issue focused on Consolidation in the Last Mile.
Visit this link to read the complete article and gain access to this issue.
The text of the article is reproduced here. Special thanks to Editor Andrea Obston for including our article in the magazine.
Until science cracks the code of immortality, 100% of owners will someday exit their business. Despite this critical fact, many underestimate the importance and overall complexity and timeline for a successful exit. Estimates from financial planning data indicate that less than 10% of business owners have a formal succession or exit strategy for their business.
In a survey from 2022 prepared by the Business Exit Institute, owners cited a range of reasons for not having an exit plan in place, including a desire to improve the business first, a belief that a plan isn’t needed, or a lack of time and money to pursue exit planning.
Planning Ahead vs. Forced Exit
Owners often envision an ideal exit scenario where the stars of personal and economic factors align. Yet, they frequently overlook the harsh realities of unexpected and unplanned pressures to exit their business, such as health crises, economic downturns, or changing industry factors.
Specifically in the trucking and transportation space, stimulus and consumer demand fueled record years in 2021 and early 2022. However, this environment rapidly disintegrated with decreased demand, rising interest rates, labor shortages, fuel price spikes, and supply chain constraints, creating a perfect storm of challenges.
The benefits of preparing and planning in advance are plentiful. Even under ideal conditions, a proactive structure can increase the likelihood of success and maximize financial outcomes, particularly in the areas of overall valuation and tax planning.
The real value appears in circumstances outside the owner's control. Here are some real calls that I’ve received in my role as a mergers and acquisitions advisor :
“Sorry to bother you on a Saturday, but can we talk about the valuation you did for us? I know we said we would revisit in a few years, but I was just diagnosed with Stage IV stomach cancer, and we will need to adjust that timeline.”
“Are you available this afternoon? My client’s husband passed away unexpectedly. She wants to sell his business and doesn’t know what to do.”
“My wife has Parkinson’s, and we hoped our sons would take over the business. After some long discussions, moving back to Michigan from California would be too disruptive for them. We have significant medical bills and care needs that we need to solve as soon as possible.”
“We have about 60 days of runway before we’re going to be in a bind to make payments and payroll.”
Fail to Plan, Plan to Fail
Much like running a business, the success of a potential exit or succession is primarily a function of strategic planning done well in advance of the exit. For generational or family businesses or businesses where the owner or founder is pursuing a first-time exit, there is often an underestimation of the time it takes to complete planning and an exit. In my experience, here are some real timelines for a sale or transition of a business:
1. Initial Planning (12-18 months): Define exit objectives, identify exit options and avenues, and develop a clear roadmap.
2. Tax and Financial Planning (1-3 years): Implement tax strategies and long-term financial planning, especially for owners who are retiring or transitioning to a family member or successor.
3. Sale or Transition (1-10 years total): Identifying the internal or external buyer, negotiating the terms of the partial or total sale, completing the transaction, transition, and closure of any notes, earnouts, or other performance-based requirements.
While these stages represent an average and vary, skipping these steps and processes completely can put a business in a position where the only viable option is liquidation. It can also limit the valuation or tax positioning related to that sale. Proper planning can also help owners to be on the right side of the discouraging statistic that 70-80% of businesses on the market never sell.
When a seller faces an exit due to a stress point or factor outside of their control, having a plan is critical. Proactive planning can be one of the best tools in an owner's toolbox to maximize outcomes.
Understand Exit Options
A key part of any plan is understanding the possible avenues for exit. Positioning the business to have as many viable options as possible is vital, especially if an expedited transaction is needed due to unforeseen circumstances.
For larger companies, an IPO can be an option, or acquisition by a public company is an option. However, this isn’t common in the lower middle market (generally, companies under $100 Million in annual revenues). For these companies, paths might include:
Recapitalization or Sale of Shares: Sale or restructuring with capital from a private investor, private equity, or venture capital firm. This option provides liquidity and can bring a strategic player that can assist with stabilization or growth.
Acquisition or merger: A purchase by an independent buyer, a competitor, or other third party. While there may be a role or requirement on a temporary or long-term basis for the owner, often, this path can provide a complete exit for the owner.
Management Buyout: The company’s existing management team buys the company from the owners/investors with the help of financing.
Passing the business to family or successors: Some of the structuring for transfers within families this can look like a recapitalization or management buyout.
Employee Stock Ownership Plan (ESOP): Mostly a fit for larger companies, this option creates a program that allows employees to buy shares from owners.
Franchising: Not typically an avenue in the freight or logistics space, but this is an avenue when there is a specific proprietary service, brand name, or business model that can be licensed to other potential owners.
Liquidation: If a company cannot continue operations or find another exit option, or the costs or benefits of doing so need to be larger, liquidation is an exit option. This can result in a loss or minimal return, but in some cases can be the best course to follow.
Tactics for Short-Runway Transactions
When faced with a sudden need to sell, or a situation where trouble is on the horizon, it’s important to engage with the appropriate experts as early as possible.
As soon as it becomes evident that liabilities are exceeding assets, there are looming concerns about the ability to meet current obligations; the earlier a business engages with an expert, the more options you have, especially when working with banks and creditors.
You can’t start too early, but you can start too late
Exit planning and preparing your business can seem like a daunting task. Especially in the ever-changing landscape of freight and logistics, it is an essential process that is manageable when done over time in manageable sections.
By proactively recognizing the specialized considerations - particularly the unique challenges for last-mile delivery providers - business owners can better position themselves to achieve their goals, even when forced to sell under less-than-ideal circumstances.
Whether the objective is an investment for growth, stabilization, or a complete exit for retirement or a new venture, understanding the available options and preparing in advance is the key.
