Do you have an exit plan for your small business? Maybe a succession plan?
What exactly is a business exit strategy?
An exit strategy at the core is a plan for winding down your involvement in a business – typically your business. This generally means preparing the business for sale, transaction, and/or a change of ownership.
Do you actually need an exit strategy?
Whether you intend to leave your business in one, five, or twenty years, you would be wise to make a plan now, like right now. You can even run your business differently and set it up for a buyer and command a higher price. It takes years, not months, to prepare a business for a new owner. The better the exit plan the higher the price you are likely to get for your business.
How do you exactly plan an exit strategy?
1. Plan for your most likely buyer
If you’re selling to family, make sure everything is transparent and fair. You don’t want the transaction to cause tension or conflict between children. If you’re selling to staff, be prepared for staggered payments. They’ll probably start with a deposit and pay you the rest from business income. If you sell to the highest bidder, then get all your records in order as otherwise they won’t have any idea how you operate, or what sort of money you make.
2. Ask how fast you’ll want to get out
Some buyers, such as family or staff, won’t have the cash to buy you out up front. You might have to keep an interest in the business and stay actively involved to protect your investment. If you want a clean break, you’ll probably be better off selling on the open market. That may not work if you have a client services businesses, however. Buyers of those types of businesses will expect you to stay around to help ensure clients don't leave. Why would they buy something and let the clients disappear?
3. Get your books sorted
Smart buyers will ask to see at least two years’ worth of clean and dependable financial records. If your bookkeeping isn't all it could be, get it fixed now and keep it up to date. If there is something you can do to improve profitability, do it as soon as possible. You want that upswing to show in your accounts as a sustainable trend rather than as a recent spike or a one-time event.
4. Make yourself unimportant
No one’s going to buy your business off you if it can’t survive without you. If you have staff, give them the training and authority they need to succeed. Scale back your involvement. Be less available to customers and clients. Delegate big decisions. Go into work less often.
5. Check that you’re organized and systematic
Ensure you have formal (and efficient) processes for getting work done. Who does what, when, and how? Make sure there are protocols to guide all this. Potential buyers will be even more impressed if some things in your business happen automatically. Then they know they won’t have to worry about it. Consider using software for administrative functions like accounting, accounts payable, payroll, inventory and so on.
6. Write down how everything happens
Write a “how to” manual for your business, so that a stranger could pick up the reins and run the business tomorrow. Record every process, including admin. Make a note of the steps you follow for each of these tasks. While you’re at it, write formal job descriptions for employees. And create templates for tasks that are repeated in your business. Think of this as a procedure or systems manual. A basic “how to” run my business set of instructions for the newcomer.
7. Figure out how to increase the value of your business
What are the things that make your business great? Do you have a really outstanding product? Loyal customers? Amazing intellectual property? Find the strengths in your business and grow them, so that they become even more valuable. Similarly, figure out the biggest holdbacks and fix them. You’ll need someone from outside the business to provide this assessment. Get your CPA involved and if they don’t have the particular skills you need, they may be able to recommend someone who does. Double down on your strengths and outsource or minimize the weakness.
8. Get a guideline valuation
Price is essentially the amount someone is willing to pay you for the business. Therefore, you may not know what you will get for your business until the day it’s sold, but you can get a rough estimate or a ball-park range. Ask for a professional opinion. Your CPA should be able to do this or introduce you to someone who can. A guideline valuation will help satisfy your curiosity and set realistic expectations. If they predict a lower price than you’d hoped, you might delay your exit, and spend some time building value in the business. You can even run your business like it is for sale to obtain top dollar at closing.
9. Work on a sales pitch
Buyers need to be excited by your business, so come up with an elevator pitch that captures the essentials. Craft a story that explains why you got started, how you’ve grown, and what you’ve achieved. Paint a positive picture of the future, too, but keep it real. Incorporate stats and facts to support what you’re saying. On larger transactions this is normally handled by the “confidential information memorandum” or the “deck” that is 50+ pages and explains the business to a potential buyer.
Exiting your business is inevitable. It will happen whether you’re in control of it or not. So why not make a plan now and start getting your business ready for the next owner. It’ll help you command a better price, and increase the chance that your business survives.
And remember that anything you do to benefit your future buyer, will also benefit you. You’ll have a more efficient, profitable and easier to manage business.
It’s never too soon to build a business exit strategy.
Brent McClure is a CPA, Strategist, Speaker, & Consultant. He primarily helps construction companies connect the dots from where they are to where they want to be.
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