Whether you plan on leaving your business in two years or 20, a carefully planned exit strategy can improve your chances getting the most out of the transition.
While it’s definitely true that “you can’t take it with you,” at some point you’ll need to make a decision regarding exactly how far you want to take it.
A well planned business exit strategy, which outlines how and when you will sell your company (and, if possible, to whom and for approximately how much) will let you make better operating decisions, maintain a focus on consistent growth, and perhaps even sleep better.
As with any major financial transaction (and they don’t get much bigger than the sale of a company), it’s important to get qualified, professional help. Consult with your accountant, investment advisor and estate planner along the way.
Here’s a guide to prepare you for talking with your team:
Business Valuations: What’s Your Company Worth?
Sometimes ignorance can be bliss, but this isn’t one of those times. You should try to get a handle on the value of your business for many reasons. These include loan applications, personal net worth calculations, estate planning, and the potential sale of – and your exit from – the company.
Values of privately held companies like yours fluctuate all the time, just like they do with public companies whose shares trade on a stock exchange. For that reason, you should have independent analyses – called business valuations – performed every couple years.
Because of all the variables involved, the valuation of a small business is not an exact science. The values of certain “hard assets” like equipment, machinery, inventory and real estate are somewhat easy to determine, but intangible assets like customer lists, a company’s reputation, number of years in business, etc. are harder to pin down.
There are many techniques of business valuations, and the most appropriate will be determined by the industry where you compete. But your appraisal team will probably use something similar to one of these methods to come up with a value for your company.
In this method, EBIT (earnings before interest and taxes) is multiplied by a certain number, usually 3, 4 or 5, to determine the value of the business. There are exceptions, but 3, 4 and 5 are generally used because it is expected that a business can earn back the buyer’s investment in 3 to 5 years.
Market Value of Fixed Assets
This is useful for determining values of companies that are asset-driven and asset-dependent, like retail stores and some manufacturing companies. Much of the valuation depends on the fair market value of these assets, or what it would cost to purchase similar assets at normal prices.
This asset valuation is normally added to a “benefit of ownership,” which is roughly equivalent to the EBIT mentioned earlier, to come up with the total value of the business.
This entails reviewing the business valuations and sales prices of similar companies (industry, size, etc.) that have sold in the last year, with the expectation that the company to be sold represents similar value. Usually, this is used as only a jumping-off point, to obtain very preliminary estimates of a company’s value.
But no matter what technique is used, it’s very rare that the buyer and seller come up with valuations that match up, or that are even especially close. This is where negotiations start.
Business Exit Strategy: Finding a Buyer
It’s possible that a buyer might find you. A competitor, or perhaps a new entrant to the industry, might see your company as an avenue to quickly increasing market share, or as a jump-start into the business. Should that happen, it can’t hurt to at least hear them out.
But in most cases, finding the right buyer at a good price will take some time and energy on your part. Start looking early (the worst time to sell something is when you have to sell) and be prepared for a few false starts. That said, here are the best places to look.
Your successor, or successors, might be in the next office or down the hall.
The benefits of selling to your employees are obvious. They know the business, they know your customers, and you won’t need to hang around too long (unless you want to) to show them how it’s all done.
Sales of companies to existing employees have unusually good track records of success, and that’s definitely worth something in terms of your legacy.
Selling to family members is a popular option, and a good one, as long as your children (or grandchildren, or nieces or nephews) have a sincere interest in the business. Consider bringing him or her (or them) on board for a trial run for at least as long as it takes for them to understand all the critical operations of your company.
But remember, the sale of your business is still a legal transaction. You might be tempted to give a relative a break on the price of the business, and that’s fine. But make sure the terms of the sale are clearly spelled out in writing so there are no misunderstandings later.
If your company is well respected and you have customer lists, equipment, products, services, and/or (especially) a market share that one or more of your competitors want, this can be a great solution.
But be careful. Move slowly and carefully. An unethical competitor might use the fact that you’re considering leaving to damage your company’s reputation in the industry, which could hurt its eventual sale price. Consider the services of a reputable business sales consultant who is familiar with your industry, or think about approaching a competitor from a different geographic area.
Business brokers can be a good source for matching you up with a potential buyer, but make sure you find a very good one. Some specialize in certain industries, while others are generalists. Some are straight “numbers guys” who might not see the particular appeal of your company.
Your accountant or lawyer should be able to refer you.
The Bottom Line When Planning a Business Exit Strategy
The most important things to remember for planning your exit from your company are to start early and get qualified help. You’ll only sell your business once. Do what you can to stack the deck in your favor.
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