Exit Strategy: You need a solid blueprint
Being a business valuation expert and consultant for the past 20 years has given me the opportunity to explore with various business owners in Central Texas the important elements of exit-planning strategies.
Not every business owner takes that important step to weigh all of the options to make a well-informed decision.
According to the Center for Women’s Business Research, approximately 80 percent of small business owners start planning an exit strategy when they are considering retirement.
Yet it’s important to think of exit planning as a blueprint for getting to the point of the sale transaction: You wouldn’t start building a house without having a blueprint, nor would you base your business exit strategy on the day you want to retire.
In most cases, there are five ways to exit your business:
• A straight sale. Selling a business to a third party is the most common form.
• Employee purchase. Transfer of ownership to one or more members of the management team who you have developed over the years.
• Family ownership transfer. Ownership transfer to one or more family members or relatives.
• Sell directly to another business. Businesses often buy other businesses for a method of quick expansion.
• Liquidation. The owner closes the company and sells the fixed assets to the highest bidder. Generally, the company needs valuable equipment and/or land so that the creditors can be paid first.
Estimate value
One of the first things to do is estimate the value of your company. It should include setting the baseline as to how your company compares to similar companies in your industry. By speaking with professionals that do sell-side transactions, the owners will be able to get a sense of the market value of the company.
Depending on the size of your business, a formal valuation by the business valuation expert or business broker is needed when you get ready to sell your company. Many of the steps in developing a formal business valuation can boost your company’s worth by uncovering some hidden value not considered in an initial estimate.
Three common ways a valuation expert will value the business is by using one or a combination of the asset, income and market approaches. Taking into account income, the valuation expert analyzes the benefit stream of the company, or cash flow, and divides that by the capitalization rate to provide a net present value of the business. The market approach compares your company to the same or similar companies that are the same size, in similar geographical areas and industry.
The business owner should also seek out a team of experienced professionals such as a transactional lawyer, accountant/tax adviser, business broker and business appraiser who will work together to execute the exit. A smaller business sale is often advised only by a lawyer and accountant. Good advisers will bring professionalism to the transaction process and in all likelihood will have a positive effect on the deal.
Business owners want to get as much as possible from the sale. That is why pre-sale restructuring becomes an effective tool in maximizing the price. If you feel that you have maximized your profits, consider hiring an outside third party such as a business consultant or your CPA to review your books and make suggestions.
To boost the sale price, grow your revenue. Consistent growth will stimulate interest in the sale. If possible, structure your company so your top managers or employees are efficiently running the operation on a day-to-day basis.
Finally, be aware that timing your exit is everything in the sale of your business. In a multi-year business cycle there will be a few occasions where the company will be at its highest valuation. As a general rule it will be at the highest value when the equity markets are at their best — like right now.
So if your company’s life cycle is approaching maturity and your own personal objectives are in alignment, perhaps it’s time to gather your team and consider your exit strategy.
