“Planning Your Exit Strategy”		«BACK
	by Dennis L. Monroe
	from Franchise Times Articles, February 2001 Issue

There are a number of questions to ask when developing an exit strategy. Answers to these questions provide the parameters, constraints and opportunities related to exit strategy. Some key questions are as follows:

Type of Multi-Unit Business:

Is the business capital intensive?
Is real estate involved?
Is this a service business?

If the Business is in the Retail Sector:

Is there high growth potential?
Is there moderate growth potential?

Current Data for Sale of Similar Multi-Unit Operations:

Review market analysis of comparables:
What factor is the sales price based on?

EBITDA?
Sales?
Proformas?

Desired Timing and Pricing:

When do you want to sell?
What pricing do you want?
What is realistic pricing?
What is necessary to get to this price?

Constraints and Opportunities:

Workforce:

Do you have employment agreements/non-compete agreements?
Do you have union issues?
Do you have employee participation plans?
Do you have an ESOP?

Financing; what type of constraints are there regarding:

Senior lenders?
Subordinate debt holders?
Outside investors?
Future funding sources?
Are there prepayment penalties or lock outs?

Legal:

What is your structure: S or C Corporation? LLC?
Are there real estate partnerships involved?
Are there any outstanding proxies?
Is there any restriction of stock?

Tax:

Are you an S or C Corporation, Partnership or LLC?
Are there built in gains from a Sub S Corporation?
How important is a stock vs. asset sale?

What are the options from the capital markets?

Potential IPO?
Private placement?
Spin-off?
Franchisor's rights?
Right of First Refusal?
Right of Consent?

The above questions are important and specific, however the most important question is, "Who are possible funding resources for the exit strategy?" There are pros and cons to each source as to its viability. I would caution multi-unit operators (particularly franchisees) against putting their hopes in the initial public offering ("IPO") market. There have been few successful franchisee IPOs. The kind of multiples provided in the IPO market for franchisees are much lower than the franchisor who controls the concept. If the IPO market is not available, you have the following options:

1. Franchisor. The franchisor may be a very good source of exit funding. Negotiate with your franchisor early. Many times the franchisor is looking to acquire stores and, in many cases, store acquisitions boost sagging earnings.

2. Other Large Multi-Unit Operators. Position your financing and your relationship with large multi-unit operators such that you become an attractive target.

3. Straight Management Buyouts. Straight management buyouts are more common today. In most of these cases, the selling owners or corporation may be required to carry back paper in order to facilitate the equity component.

4. Equity Buyout Funds. A number of funds look to the seller's skilled operating people and bring them into key management positions as they move forward. This may be particularly true if the fund specializes in minority business enterprises where they are looking to set up qualified managers who can take advantage of various benefits provided by franchisors and the SBA.

5. ESOPs. ESOPs have become more accepted with multi-unit businesses. Our office has been involved in a number of ESOP projects, particularly in the automotive aftermarket, restaurant and hair care industries. An ESOP can afford the seller significant tax advantages as well as provide ongoing tax benefits for the ESOP trust under a leverage buyout.

Regardless of who your prospective buyer may be, the key is to always arrange your affairs so you do not limit appropriate exit strategies. The motto is, "When you buy, buy toward the thought of sale." Today's market is too volatile to believe a business interest will be held forever.