Question

Bob has a prosperous financial service business that he no longer wants to run. In 300 words of more, provide Bob with an exit strategy. a strategy to sell the business. Consider the financial statements such a P&L. Cash Flow, & Balance sheet.

Answer 1

Business Exit Strategies:

There are various exit strategies for exiting a business. The suitability depends on the circumstances and the type of the company.

Let us now see the various options that can be considered by BOB to exit the business.

1. Liquidating the Assets of the Company:

In this, the total value of the assets of the firm is arrived at and the value of liabilities are deducted to arrive at the Net Assets value of the company.(Assets – Liabilities)

Fair value of the assets need to be considered (instead of historical value). Balance sheet of the firm is the basis for arriving at the value of the assets & liabilities. As it is the profitable business, certain value has to be arrived at for “goodwill” of the business and included in the value of total assets.

This method of exit will suit for asset heavy company and generally not suited for consulting firms.

1. Transferring ownership to family or friends:

In this option, the owner of the firm can transfer the ownership of the firm to his successor who would generally be from his family like son or daughter. In this way, the legacy of the business will be carried on by his kins and there would not be any feeling associated with “selling of business”.

1. Merger with another company – controlling stake is sold:

This is the best strategy of exit for a profitable consulting business if there is no successor from the family.

The steps are;

1. First arrive at the valuation of the business.
2. In arriving at the value, either “Net assets” method as discussed in option 1 above or “Net Profit/earnings” method can be followed. (Alternatively, cash earnings of the firm also can be considered. Cash earnings can be ascertained from the cash flow statements)
3. In Net profit method, normal earnings (ignoring abnormal earnings or one time incomes) generally earned from the business is arrived. Then, the desired multiple is assigned to arrive at the valuation of the business.

For eg.,If Normal earnings of the business (as taken from P & L a/c) is $2m.

Assign a multiple of say, 8 times.Then, the value of the business is $16m (8*2=16).

For the buyer of the business, if the business yields the same level of earnings ie., 2m per anum, then the return on investment for him is,12.5% (2/16=12.5), which is a decent yield for the investor.

In this option, either entire stake can be sold to another company (in the same line of business) or majority controlling stake is sold, thereby he is relieved of day to day running of the business. At the same time, certain stake may be retained so that regular income is assured.