Book: Exit Strategy

Adam Coffey describes himself as a "blue-collar CEO" with experience in the military, engineering, and mid-level management at General Electric. He then spent twenty years in private equity, serving as president of three different national, private equity-backed companies (Masterplan, WASH Multi-Family Laundry, and CoolSys), growing them through a "buy and build" strategy. He has personally bought, sold, and financed around one hundred companies with values ranging from under $1 million to over $1 billion.

Purpose of the Book: The book aims to serve as a "primer to help open your eyes to some of the many intricacies that you will encounter when seeking maximum value at exit." It is not intended as financial or legal advice but rather to demystify the sales process and prepare business owners for the journey. Coffey emphasizes the critical need to assemble a team of expert advisors (attorneys, accountants, investment bankers).

Part One: The Universe of Buyers and Exit Strategies

This section introduces the different types of buyers a seller might encounter:

• Strategic Buyers: These are companies that grow by acquiring other companies for reasons such as expanding market reach, building density, or gaining expertise and technology. The backing and payment method of the strategic buyer are less relevant than the fact that one company is purchasing another.
• Coffey distinguishes between two types of strategic buyers:
• "Turn the Lights Off" Buyers: Primarily interested in the target company's customers and market density. They often integrate operations and eliminate redundant overhead. Coffey's experience at WASH involved this approach frequently.
• Buyers Who "Invite You to Join the Team": Value the expertise and leadership of the acquired company's management and seek their continued involvement.
• Sellers should determine their post-close goals (retirement vs. continued involvement) to identify the best fit. Asking about the buyer's acquisition history and the retention of previous owners can provide valuable insights.
• Financial Buyers: Primarily private equity firms that invest capital to acquire companies with the goal of growing them and selling them for a return (typically aiming for a three-times multiple of invested capital - MOIC). They bring capital and strategic guidance but generally not operational machinery.
• Coffey highlights his experience leading three financially owned platforms and acting as a strategic buyer under their backing.
• Financial buyers come in various sizes (boutique/micro, small, midsize, large, mega firms), and the appropriate size of the firm often correlates with the size of the target company. Coffey provides a formula based on EBITDA and industry multiples to estimate the target financial buyer's fund size.
• Rollover Investment and Second Bite of the Apple: Financial buyers often encourage sellers to reinvest a portion of their proceeds in the acquiring company, allowing them to benefit from future growth and another potential sale.
• Financial buyers are a good option for owners seeking to diversify assets but not fully exit, offering opportunities to stay on and drive growth.
• Alternative Buyers: These include less common but sometimes attractive options:
• Owner-Operator: Often seen in professional practices (e.g., dentists), where a younger individual takes over the business, sometimes with the seller providing a transition period and potentially holding back a note.
• Management-Led Buyouts (MLBOs): Occur when the existing management team acquires the company, typically financed through debt. The management team maintains control in a true MLBO. These are often "friendly transactions" with trust between parties.
• Initial Public Offerings (IPOs): Generally suitable for companies with significant revenue ($100-$500 million minimum, ideally closer to $1 billion). They involve high complexity and expenses. Sellers sometimes pursue a "dual-path exit" by exploring both IPOs and sales to strategic/financial buyers.
• Special Purpose Acquisition Companies (SPACs): Shell companies that raise capital publicly and then acquire an existing private company. Coffey views them as a combination of strategic and financial buyer universes.
• Employee Stock Ownership Plans (ESOPs): While not extensively covered, they are mentioned as a potential exit path.

Part One Wrap-Up:

Coffey provides a "Sell-Smart-Chart" that suggests the most suitable buyer type based on the seller's circumstances (e.g., wanting to stay working, retire soon, prioritize top dollar, concern for employees, desire to roll over). He also notes that smaller companies (under $1 million gross earnings) often target strategic buyers or owner-operators, while very large companies ($40-$100+ million gross earnings) have choices between large strategic and financial buyers. The key takeaway is that sellers staying with the business will cede control to a new majority shareholder.

Part Two: Prepping Your Business to Sell

This section focuses on preparing the business for a sale to ensure a smooth process, fast close, and maximum value.

• Financial Reporting: Buyers need a clear understanding of the company's financial picture. While entrepreneurs often aim to minimize taxable profit, having well-tracked and clean financial records is crucial for the sale process.
• EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): This is the key metric used by most strategic and financial buyers to value companies.
• Types of EBITDA:As-Reported EBITDA: Based on raw financial statements.
• Adjusted EBITDA: As-reported EBITDA with legitimate add-backs (e.g., owner's personal expenses run through the business, one-time costs). Sellers should be prepared to justify these adjustments.
• Pro Forma Adjusted EBITDA: Projects future earnings based on signed deals, lost business, and post-acquisition expense changes.
• Trailing Twelve Months (TTM) EBITDA: EBITDA calculated over the past twelve months.
• GAAP (Generally Accepted Accounting Practices): While not mandatory for private companies, aligning financial reporting with GAAP makes it easier for sophisticated buyers to conduct due diligence.
• Quality of Earnings (Q of E): Buyers conduct a Q of E to verify EBITDA and assess its sustainability. Sellers should proactively conduct a sell-side Q of E to anticipate buyer findings and address potential issues.
• Presenting at least three years of financial statements demonstrates the business's performance trends. The level of financial reporting detail expected varies with the company's size.
• Real Estate: If the business owns real estate, sellers need to consider its impact on the sale.
• Buyers will factor in fair market rent for owned properties, as the ongoing business will incur this cost. Not charging rent previously may have inflated EBITDA.
• Sellers can create an ongoing income stream by establishing a fair market lease agreement with the buyer for a reasonable term (5-7 years). Overly aggressive lease terms may be rejected.
• Aligning Operations: Sellers need to develop a narrative for potential buyers regarding their future involvement (staying or leaving) and the sustainability of the business.
• Even if leaving, a plan for a smooth transition and continued normal operations is important. If staying, plans for accelerated growth should be presented.
• Identifying potential merger and acquisition opportunities for the buyer (especially if a financial buyer seeking a platform company) enhances the company's attractiveness.
• Demonstrating the scalability and efficiency of the business operations, including technology infrastructure, builds buyer confidence. Identifying and having plans to address bottlenecks is beneficial.
• Understanding the company's performance during past recessions ("peak to trough") is important, especially for financial buyers with shorter investment horizons.
• Preparedness significantly impacts the speed of the sale process. Clean books and a clear understanding of financials can drastically reduce the time to close.

Part Three: Build Your Advisory Team

This section emphasizes the critical importance of assembling a competent team of professionals specializing in the sale of companies.

• Tax Advisors and Accountants: Essential for preparing the business for sale, understanding tax implications, and navigating diligence. They can help with adjusting EBITDA and anticipating buyer questions. Sellers need both a competent tax advisor and an accountant, who may or may not be the same person or from the same firm.
• Lawyers: Selling a business requires specialized legal expertise beyond general corporate law. A competent lawyer will protect the seller's interests in the purchase agreement, including terms beyond just the price (e.g., trailing liabilities, working capital true-ups). Poor legal advice can cost sellers significant amounts post-closing.
• Investment Banker/Transaction Advisor: Crucial for maximizing value by creating a competitive bidding environment. They develop a "universe of buyers," market the business, manage the sales process, and provide expert guidance. Private equity firms always use investment bankers when selling companies, highlighting their value. The size of the investment banking firm should generally align with the size of the company being sold.

Part Four: The Sales Process

This section outlines the typical steps involved in selling a company with the help of an investment banker.

• Building Your Team (Internal): Involve key personnel from finance, operations, and sales/marketing to assist with the sale process.
• Crafting Your Story: The banker will work with the seller to develop a compelling narrative for potential buyers.
• One-Page Teaser: A brief, anonymous marketing document highlighting the company's key attributes and industry. Sent to a broad universe of potential buyers.
• Nondisclosure Agreement (NDA): A confidentiality agreement that interested buyers must sign to receive more detailed information.
• CIM/CIP (Confidential Information Memorandum/Presentation): A comprehensive document (50-100 pages) providing extensive details about the company, its operations, market, financials, and growth prospects.
• Fireside Chat: One-on-one conversations between the seller (and banker) and potential buyers to answer questions and build rapport.
• IOI (Indication of Interest): Nonbinding bids from interested buyers, typically expressed as a price range, along with information on financing and deal structure. The banker helps the seller evaluate and narrow down the pool of bidders.
• Management Meetings: Potential buyers meet with the company's management team to assess their capabilities and the overall health of the business.
• Exclusivity: The leading buyer(s) may be granted a period of exclusivity to conduct further diligence and finalize their offer. Granting exclusivity involves risks, and the banker plays a key role in managing this process.
• Diligence: Buyers conduct in-depth reviews of the company's financials, operations, legal standing, and other aspects to confirm the information provided and identify potential risks and liabilities. Sellers need to be transparent and well-prepared for this stage. A data room is typically used to organize and share information.
• Definitive Agreements: Legal documents outlining the terms and conditions of the sale. Competent legal counsel is essential during this phase.
• Timeline: A typical sale process managed by a banker can take four to six months, with diligence often being the longest phase. However, well-prepared sellers can expedite the process. Preemptive bids can sometimes truncate the process significantly.

Interacting with Buyers:

This chapter focuses on the seller's conduct during the sales process.

• The fireside chat is the buyer's first direct interaction with the seller.
• Sellers must remain vigilant and professional at all times, including during social settings. Even seemingly casual interactions can influence the buyer's perception and valuation. Coffey recounts an anecdote of a seller's deal being jeopardized by irresponsible behavior during a dinner.
• Sellers should be prepared to discuss their desired level of post-acquisition involvement.
• Rollover Investing: Financial buyers often expect sellers to reinvest a significant portion of their proceeds. Coffey suggests a "law of rollover" where sellers take 66% home and roll over 34%, allowing for a potentially larger "second bite of the apple" due to private equity's target returns. Rollover investing can create significant long-term wealth.
• Successful scaling of a business requires a shift in the entrepreneur's mindset from being highly controlling to trusting and delegating. Learning to partner is crucial during a sale where continued involvement is desired.

Notable Anecdotes/Examples:

• Coffey's experience growing companies through "buy and build" strategies at Masterplan, WASH, and CoolSys.
• His brother Mike's experience selling his insurance agency and encountering sophisticated buyers.
• The example of WASH acquiring plumbing companies primarily for customer density ("turn the lights off" strategy).
• The $500 million CoolSys deal that closed in three weeks due to a strong preemptive bid and efficient diligence.
• The cautionary tale of the seller whose deal was jeopardized by their behavior at a dinner with potential buyers.
• The analogy of Apple's packaging ("sexy headquarters") to emphasize the importance of a positive impression during management meetings.

Key Themes and Important Ideas:

• Understanding the different types of buyers (strategic, financial, alternative) and their motivations is crucial for tailoring the exit strategy.
• Thorough preparation, especially in financial reporting (clean financials, understanding EBITDA, conducting a sell-side Q of E), is essential for maximizing value and expediting the sale process.
• Assembling a competent advisory team (tax advisor, accountant, lawyer specializing in M&A, and investment banker/transaction advisor) is non-negotiable for a successful outcome.
• The sales process is structured and involves distinct stages, each requiring careful management.
• The seller's behavior and professionalism throughout the process significantly impact the buyer's perception and the final terms of the deal.
• Rollover investing can be a powerful wealth-building strategy when partnering with a financial buyer.
• Be mentally prepared to relinquish control if staying with the business post-acquisition.

This briefing document provides a comprehensive overview of the main themes and important ideas presented in the excerpts from Adam Coffey's "The Exit-Strategy Playbook." It highlights the author's extensive experience and practical advice for business owners considering selling their companies.

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