Simplify Your Exit Strategy
Business owners face important challenges as they consider the proper exit strategy. For some, the decision to sell a business can be difficult. After spending years pouring blood, sweat and tears into the business, they come to the point at which they must turn the keys over to someone else. If there are no heirs to consider, the decision can be even more difficult and require extra deliberation.
For other business owners, the sale is an exit strategy that is a welcome one, creating the liquidity the owner has worked for over the years. In either event, owners should begin preparing for the sale several years before the event to allow sufficient time to plan and execute the tasks it takes to maximize the value of the business.
Determining the Worth of Your BusinessA critical step in the sale process is determining the market value of the business. Although this may vary from industry to industry, factors include:
- The owner’s discretionary cash flow. A formula frequently used by business brokers is a factor of two to four times the owner’s discretionary cash flow.
- Condition and value of assets
- Real estate holdings
- Other more subjective factors, including the experience of staff, quality of customer base, whether the business is growing or downsizing and the business’s age and reputation.
Review the findings with your broker. If the preliminary results are not at a level you had hoped for, work with your broker to develop an improvement plan and timetable.
Owners must be realistic when determining a sale price, eliminating or at least minimizing the emotions of ownership. With the availability of Internet research and other market value databases, buyers are generally knowledgeable about realistic asking prices. As a result, they’re unlikely to pay too much for a business. Many sellers tend to overvalue their business, a condition that may delay a transaction with an otherwise ready buyer. This is why a professional business valuation is a wise step.
Just as marketing goods and services attracts customers, owners should market their businesses in a way that maximizes value in the eyes of a potential buyer. The following tips will help owners get the best price:
- Organize finances first. Owners should make sure all financial records are complete and in good order. Consult with your accountant on how best to present these.
- Ensure the building and equipment are in good shape.
- Seek tax and legal advice before selling. Tax advice is particularly important, as owners will not be able to keep all the proceeds from the sale of their business. In some situations, taxes can amount to as much as 50 percent of the sale price. Having the sale properly structured, whether as stock or an asset sale, can minimize taxes.
- Don’t stop running the business during the sale process. It’s easy to mentally “check out” of the business when there’s an interested buyer. Unfortunately, this can make the business regress if the sale falls through.
- Consider the impact of the sale on your employees. Employees may worry about their job security, so ask the advice of your broker on how to handle the sale process.
