Exit Planning for Engineering Firms
As an owner of an engineering firm, you enjoy your work and your firm’s success, but designing an exit planning strategy might not rank as a business priority. However, it is a significant aspect of practice management and involves finding a suitable buyer and managing your exit’s impact on employees, clients, and continued operation.
The primary focus of an exit plan is to maximize the business value before you leave the firm to safeguard your future financial interests. Unfortunately, most engineering firm owners don’t think about their exit until it’s far too late.
You likely started your firm with a clear vision of your ideal clients and the type of work you wanted to do. You got into this because you love the process of bringing your creative ideas to life, not so you could plod along a slow, methodical journey to build a business fit to sell and retire.
The harsh reality is that all business owners must eventually leave their businesses one way or another. So, it just makes sense to be prepared and plan for your exit well in advance with a clear vision of the end game.
Consider these questions when planning your exit from your engineering firm:
- When do you wish to leave your business? Will your departure be incremental or all at once?
- Do you want your business to continue? If yes, do you have a vision regarding the future sustainability of your business, clients, and customer, and other core business competencies?
- How strong is your firm’s workforce? Have you empowered them with additional or niche skills?
- Do you need to cash out of your business to fund your post-retirement lifestyle? If yes, will selling the business affect its financial health?
- Do you wish to remain involved in the business after exit? If yes, in what capacity?
- The road ahead for your business exit will depend on market reality, the business’s needs for growth, and your aspirations and needs.
What Is Exit Planning?
Exit planning is a structured, detailed process that helps entrepreneurs plan to leave the company they built. The end objective is to maximize the business’ value and meet all the owner’s personal and business goals. It involves a complete analysis of the company’s financial, legal, and tax options and manages the effect of the owner’s departure.
An exit planning advisor usually spearheads the exit planning process for engineering firms by helping the business owner formulate and execute an exit plan strategy. The ideal time to start the planning process is usually four to five years before the business owner intends to leave.
An exit plan addresses the following aspects:
- Personal financial needs
- Business and value problems during the ownership transition.
Do I Need an Exit Plan for My Engineering Firm?
Yes, you do!
- Developing an exit strategy business plan is especially important for engineering and manufacturing firms since these businesses have many assets, employees, and clients that need to be considered at all times.
- Nobody wants to be caught off-guard, especially when faced with a sudden, unexpected scenario. By developing a business exit strategy, you help ensure that, should you have to leave the business suddenly, you and your business aren’t left stranded, and there’s a plan to bring order to the chaos.
- Most businesses focus on maximizing the owner’s profit now, but exit planning helps understand the buyer’s perspective. This enables you to identify areas that need improvement and to design a strategy for further improvement.
- Correctly executed exit planning leads to a more substantial, profitable engineering firm by streamlining business operations to be less dependent on you. This results in less risk, more repeat business and clients, and heightened operational thoroughness.
- Understanding what you will need to exit from your business and how to get there also helps you plan the next steps for your employees after you transition the business.
How Do Engineering Firm Owners Generally Exit?
Your plans going forward will affect how you handle your exit from the company, so you should have a good idea of what you plan to do after your exit. For example, you may want to retire, start a new business, or take on a different role. Let’s look at a few exit options for your engineering firm.
Management Buy-out (MBO): The management team combines their resources and acquires the business and its assets. They take complete control and ownership of the firm and use their expertise to grow the company further. However, there are several considerations, such as assessing the desire and the reliability of the management team, the source of funding, and if all parties involved are agreeable to the proposed funding mix.
Internal Transition to an Employee Stock Ownership Plan (ESOP): The business sets up a trust fund. Ownership shares are issued to the employees to encourage employee ownership in the company. The shares are given at a discounted rate as a part of the employee benefit plan.
Merger & Acquisition (M&A): In this exit transaction, two companies of similar size either merge to become a single business entity or a more prominent firm acquires a smaller company, absorbing the ongoing business of the smaller firm.
Initial Public Offering (IPO): The business owner offers shares of the company to the public by issuing stocks. Capital is raised through public investors. The company issuing an IPO must meet all the requirements set by the Securities and Exchange Commission.
What Are the Key Steps to Exit Planning in an Engineering Firm?
In the absence of an organized market, an exit plan will give a reference point for the sale price of your business. It is essential to know your engineering firm’s market value because only then can measures be taken to increase the value until it is time to sell your business.
- Begin by analyzing your engineering firm and the current market situation to decide when and how to exit. This will also help determine how much time you have to build value and which exit strategy will best help achieve your business and personal goals.
- Establish the baseline value of your business to understand its current market position, how the company fares against its competitors, and its current value. By establishing the baseline value, you know exactly how much value needs to be optimized and what action items will help. Baseline value will also clarify whether the business is ready for an exit or the deal needs to be enhanced further. If the baseline value is adequate, then move on to the following steps, otherwise initiate a value creation plan.
- The next step is to identify which exit strategy best suits you, your business goals, and your personal goals. Will your business be liquidated, merged/acquired with/by another, or taken over by the management team? Once you determine the right exit strategy, it’s time to look for suitable buyers, conduct due diligence, draft the letter of intent, negotiating the final sale price.
- Once your engineering firm has achieved its target value, you can transfer the business owner to the new buyer and, if appropriate, integrate the two business entities.
The expert team at Quantive can help you determine your firm’s baseline value and identify the value gap. Contact us today!
Who Can Help Me?
It’s preferable to avail yourself of expert advisors when making meaningful decisions such as exiting your business. Your team will help you decide the best option for you in the future. Legal and financial advisors are also instrumental, as they can anticipate and address tax issues and legal issues.
Most engineering firm entrepreneurs work with a value creation consultant or an exit planning advisor working with engineering firms to develop their value creation strategies and plan for their eventual exit. Some firm owners prefer to work with an advisor in their city or region as well.