4 steps to understanding your exit strategy
- By Jamie Waldren
- Aug 10, 2011
The world of government contracting can be capricious and unforgiving. One year, you are servicing a $20 million dollar contract and managing dozens of employees; the next year it’s over, and you are scrambling to find a comparable engagement or face layoffs and reduced revenues.
In fact, when it comes to exit planning, timing is crucial. Windows of opportunity can be dismayingly small and infrequent. If you aren’t watching for them and aren’t prepared when they appear — if you blink — you’ll miss your best, and perhaps only, chance to secure an optimal sales price.
Timing it right
According to the Exit Planning Institute, 75 percent of former business owners report that the sale of their companies did not meet their business objectives. In my experience, post-exit dissatisfaction levels among government contractors are similar, and maybe a good deal higher. But it doesn’t have to be that way.
If you are like most government contracting executives, you’ve got plenty to think about: from managing your team of contractors to responding to requests for proposals and handling the myriad details associated with running your firm. Apart from setting aside money for retirement, there’s a good chance you haven’t given your retirement strategy much thought.
But it takes foresight to make the most of your opportunities. When the time is right — when market conditions, business economics, valuation metrics and personal circumstances align — you need a plan in place, ready to implement quickly, in as little as two to three months. You also need a system to monitor these changing factors so you won’t miss an opportunity while you are busy running your business.
The exit plan
Your financial security could depend on the quality of your exit plan, a comprehensive road map that will transition you out of your business and into the next phase of your life. Before you begin drafting an exit plan, start thinking about what you want and how your will get there:
- Set clearly defined goals — for yourself, your family and your business.
- Decide how you want to sell or transfer your shares.
- Tailor your investment portfolio to let you live the post-work life you always imagined.
- Be prepared — psychologically and operationally — to pull the trigger when the time is right.
This last point is critical. You have to be ready to make the transition at any moment. If you hesitate, you will lose. Perfect conditions can deteriorate rapidly, and the best times to sell are almost always your busiest and least convenient.
Keep in mind that your exit plan doesn’t necessarily have to push you into retirement. Many former owners remain active in their business even after the sale. That’s fine. Just put it in the plan.
Creating your plan, pulling the trigger
Don’t think you can carry your exit plan around in your head. It must be written down so that it can be executed efficiently. At minimum, your plan should accomplish the following:
- Describe in detail the conditions that will trigger your exit.
- List the steps required to sell or transfer your ownership.
- Spell out your financial goals and supply a road map for reaching them.
- Detail estate and tax planning strategies.
- Explain any contingencies or options that might accompany the transaction — for instance, the option to continue working and how you will be compensated.
Your exit plan will be triggered by a number of variables — metrics that can be difficult to define and monitor on your own. You might want to engage a financial professional who understands your business environment to help you develop your plan, track key metrics and alert you when promising conditions emerge.
You might also want to consult a valuation expert who can advise you on critical factors that affect the sales price, such as the number and quality of contracting vehicles in your firm’s portfolio, the proportion of set-aside revenue, security clearances, past-performance credentials and other criteria. And you might want to seek qualified advisers to help you negotiate the best terms of sale. When it’s time to pull the trigger, you’ll want your expert advisory team in place and ready to go.
Owning a government contracting firm comes with many variables and risks. Smart exit planning can help entrepreneurs like you minimize the risk and make your life goals achievable. Whether you have three or 30 years of business ahead of you, it’s time to develop a detailed exit strategy — today. If you put it off, if you blink, your dreams could be gone in a flash.
DISCLAIMER: The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC, Member SIPC, or its affiliates.
Jamie Waldren is the founder of the Waldren Group at Morgan Stanley Smith Barney and a Financial Advisor with the Global Wealth Management Division of Morgan Stanley Smith Barney in Columbia, Maryland. He specializes in working with government contractors.