Dr. Matt Brubaker is Chairman and CEO of FMG Leading, an advisory firm on a mission to make healthcare work, better.
Business owners looking to recapitalize or sell their companies finally have some reason for optimism. After several challenging years, exit conditions look more promising in 2025, generating confidence about firms’ ability to engage serious buyers.
Those hoping to seize this opportunity would be wise to avoid overconfidence, understanding that successful exits will continue to depend on preparedness. Specifically, preventing suboptimal or botched deals will require them to heighten their focus on the often-ignored, people-centric issues that can derail or suboptimize exits.
For many C-suite executives, exits represent rare, even once-in-a-lifetime liquidity events, making it challenging to anticipate potential pitfalls—especially in regard to the people in their organizations. Yet investors and advisors party to transactions on a routine basis have seen how the potential for life-changing payouts can inadvertently compromise even the best leaders’ judgment and focus.
Consider this scenario: Following a few preliminary meetings with bankers, two executive committee members seriously consider the possibility of a near-term exit, with estimated valuation numbers generating excitement about their future financial positions. Because they believe a transaction is imminent, one executive greenlights the construction of a lavish new residence to serve as a family compound for generations. Shortly after the groundbreaking, they’re told the deal is on ice due to some anticipated regulatory changes that spooked the investor and spurred significant fears of overleverage. The stress impacts the executive’s performance, and the company starts missing its targets.
Some version of this story happens too often in markets like this one. Still, leaders can avoid tragedy if they sufficiently prepare for the predictable emotions and reactions that often accompany exits. Doing so requires a solid understanding of some crucial best practices that have the power to make or break deals.
Remain open to multiple scenarios.
While deal flow is improving, organizations are unlikely to see the ultra-competitive offers that characterized the frothy years of 2021-2022. Internalizing this reality will help leaders open their minds to numerous advantageous exit outcomes that serve the interests of organizations and their stakeholders. Those who embrace this flexible mindset instead of fixating on just one idealized scenario will gain a stronger position to capitalize on today’s market thaw.
Keep the inner circle small.
While it may contradict management beliefs about transparency, it’s wise to thoughtfully manage the number of leaders who know about an exit until a letter of intent (LOI) is signed. The prospect will become a meaningful distraction to some, if not all, of the executive team, ensuring they divert a portion of their bandwidth from value creation to value anticipation. You can avoid such distraction—or at least delay it—by limiting who you inform of early exit milestones.
Recognize the limits of compensation structures.
It’s easy to assume that compensation and equity grant programs tied to exit strategies will keep executives engaged and incentivized. Unfortunately, rising inflation combined with reduced deal activity has prompted more and more leaders to look for greener pastures. They’re simply less amenable to grueling hours and family sacrifices in anticipation of paydays that feel uncertain or farther away. Understanding that resignations can derail exit plans, leaders should do everything possible to keep their people in the door and working at the top of their capabilities.
Know when banker conversations become distracting.
Amid slow deal flows, CEOs and CFOs often communicate with investment bankers to stay relevant, engaged and highly focused on eventual exit outcomes. Unfortunately, too much of such dialogue can create unnecessary risk, distracting leaders from their management responsibilities and creating a sense of fatigue. What’s more, these conversations can inadvertently dull leaders’ clarity and optimism surrounding their organizations’ exit potential, leading to disillusionment at the executive level.
Recognize that failed exit processes are not the end of the world.
In the event of false starts or other setbacks en route to an exit, help ensure management team members can understand them within the larger framework of value creation. Reinforce how dramatically the market has changed in the last few years, making missteps a frequent part of the process. Leaders should further articulate lessons learned that will equip all parties to continue driving value for the foreseeable future.
Above all else, management teams should stay focused on running their organizations as though they intend to run them forever. This attitude requires them to avoid any artificial or temporary inflation of EBITDA through gimmicky, short-term sprints in the name of cost conservation. Too often, these sprints turn into marathons that create devastating operating conditions and destroy real value. Savvy leaders avoid this pitfall and ensure value creation efforts continue while the markets recover.
Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?
Read the full article here
