Entrepreneurship and the Graceful Exit

What does the entrepreneur have in common with the commander of an army on the eve of battle?

Both need an exit strategy--not an escape hatch but, rather, a clear understanding of three things:

* What they intend to accomplish.

* How they intend to accomplish it.

* How they expect to put a stop to all the commotion.

The fact is, however, that many entrepreneurs, not to mention the owners of many an established business embarking on a big growth campaign, offer only vague answers when you ask them to discuss these things. All too often, they say that success is the goal and hard work is the means to it--followed by years of playing golf in Hawaii.

You must be far more specific than that, saying clearly what your goal is, how you intend to achieve it, and what the payoff will be.

As discussed in this space last week, your exit strategy is not the least important of these things, and the time to plan it is in the beginning, when you embark on establishing your business or, later on, when you begin a major growth campaign.

Indeed, if you get the basics right--setting clear goals for yourself and your enterprise and making sure everybody knows how to get there--you open up many possibilities for making a graceful exit, all of them attractive indeed.

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Lee Perlman and his partner Adam Carroll can testify to this truth firsthand. They run New Age Electronics Inc., a national distributor of name-brand office products for small businesses headquartered in Rancho Dominguez. The company’s vendors include Hewlett Packard, IBM, Sharp, Canon and Lexmark; its customer list includes such names as Sam’s Club and Costco.

The essence of the distribution business is simple: You must move product between manufacturer and retailer rapidly, reliably and cheaply. And most distributors operate on high volume and thin margins; Perlman and Carroll expect New Age Electronics to hit $1 billion in sales this year, generating a gross margin of 3.5%, including 2% for overhead.

In the real world, what these numbers mean is that Perlman and Carroll must run a tight ship; there’s no room for error, and plenty of upside potential if they do things right.

“Four years ago, we were doing $56 million in annual revenue,” Lee Perlman says. “We saw an opportunity to offer products from one of our suppliers, Hewlett Packard, to new customers, and we knew we needed new infrastructure to handle the growth.

“In real estate, it’s location, location, location. In distribution, it’s execution, execution--or be executed. We needed to learn new ways to handle the logistics of the supply chain.”

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Enter Chris Malburg, director of exit strategies at Kibel Green Issa Inc., a Santa Monica consulting firm specializing in workouts, turnarounds and exit strategies for privately held middle-market businesses. With Malburg’s help, Perlman and Carroll submitted their operation to a rigorous analysis, identifying strengths and weaknesses and plotting a strategy to enable them to manage explosive growth.

“We learned that we focused very well in handling specific projects for specific customers, but we didn’t run as a team, and we didn’t have the back-office or the front-office infrastructure to handle the growth--mechanization in the back office, accounting and systems infrastructure in the front office,” Perlman says.

“Our strength was that we were willing to get the job done at any cost. The flip side was our weakness; our execution could be sloppy,” he adds. “We redefined operational excellence as a team effort in which everybody had a share, including our vendors and our customers.”

The result? Revenue went from $56 million in 1995 to $106 million the following year. They hit $288 million in 1997, $433 million in 1998. Perlman and Carroll think they can hit $1 billion this year.

Perlman and Carroll have no intention of walking away from their success. Ask them about an exit strategy and they make it clear that they won’t put a stop to the commotion for some time.

But as consultant Malburg says, any business posting success like that of Perlman and Carroll gives its owner plenty of options for graceful exits--a public offering, a leveraged recapitalization, a merger with a competitor, sale to a strategic or financial buyer, even a sale to managers and employees through an employee stock ownership plan.

“Success in business often leads to an undue concentration of the owner’s net worth in just one illiquid place, the business,” Malburg says. “But if you run your business constantly as though you were putting it up for sale, you place yourself in position to say yes or no to any number of exit strategies.

“If you have all your eggs in one basket, you lose flexibility. It always takes time and effort to tee up a business for sale, but if you continuously run your business with a sale in mind, you dictate your own exit.”

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For their part, Perlman and Carroll want to keep growing their business. And they like having options.

“There’s no secret that the distribution business is consolidating,” Lee Perlman says. “We’re very successful niche players, and we could sell or go on an acquisition campaign or maybe do a public offering.

“We could do pretty much anything we wanted--because the company is running on all cylinders.”

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Juan Hovey can be reached at (805) 492-7909 or at jhovey@gte.net.