Special article written by Keith Schellin, owner of corebizjp.com. Be sure to ask him exit planning questions directly in our business AMA forum.
Four Basic Tenets of Exit Planning
More information on efficient exit planning is in the special series on basic concepts an owner should address before beginning any exit, succession or transition plan. They are:
- Distance to Goal.
- Prospective Buyers.
- Professional Team.
After I got out of the military, and during my second year of college in Tokyo, I built my first business at the age of 26. It was a lifestyle business, meaning that its purpose was to make enough money to support my lifestyle. I never tried to grow it beyond that. Looking back now, and knowing what I know now, I could have easily, given the time period, built it to at least 10 X its annual revenue without much effort.
After 20+ years I closed the business down. Again, it never occurred to me to sell it. I didn’t even consider that someone else might want it. Maybe this came about as a part of my experience of working with small business owners in Japan. Most small business owners, unless they plan to turn their business over to their children, tend to shut their doors when they retire or decide enough is enough. Very few, unless they are much larger think about selling.
I moved to San Francisco and began to work with a company that helped small business owners with their businesses. I began to work as a business coach, a peer advisory board facilitator and I began to learn about Exit Planning. Most of the emphasis of Exit Planning was and still is on helping Baby Boomers planning the exit of their businesses. After a few years of training, self-study and on-the-job training (working with business owners using Exit Planning) I began to see other ways that Exit Planning was a benefit to business owners. So much so that I began to realize that it was in fact one of the best ways to run a business.
I saw that Strategic Exit Planning was in fact Building your Business to Sell. When you look at your business through the eyes of a potential buyer it gives you a different perspective. Do you own a business that someone else would want to buy? Why or Why not? If Yes, then how much would they be willing to pay for it? Is that the same amount you think it’s worth? Why or Why not?
Getting your house in order
If you are going to put your house on the market you’re probably going to make improvements and upgrades in order to bring a better price. A business is no different. You’re going to want to make improvements, upgrades and changes in order to get a higher price for it. But wait a minute, why would you want to do this for someone else? Why wouldn’t you want to do it for yourself and reap the benefits of a better business while you’re the owner. It only makes sense. In fact, if you prepare and run your business like you’re going to try to sell it tomorrow wouldn’t it be a much better business as a result? Who wouldn’t want that.
People want to buy healthy companies. Cash Flow positive companies. Companies that can be run without their founder. Companies that can be scaled and grown. And, if you are a business owner, isn’t that the type of company you want to be running?
Is your business built to sell?
This is one of the best tests of the performance of your business. Is it performing at its optimum level? Is it performing at the level that you’ve always wanted or felt it should be? If not, why not? What needs to be done to make it that way? Putting a strategic exit plan in place and assessing it through “Is it built to sell?” and making changes will without a doubt give you a better life style and better business.
Most businesses have a business plan or should have a business plan. A business plan tells you about your products & services, your customer, how you’re going to make money, and so on. A very often overlooked part of the business plan is the exit plan. What most business owners don’t realize is that the exit plan is one of the most important parts of a business plan.
A business plan is like a plan on how to build a boat, but an exit plan gives the boat a steering wheel, a destination, helps navigate changes in wind & weather along the way and tells us when we have arrived.
Experts say the best way to ensure you leave your company when and how you want with money in hand is to start plotting your exit strategy now, even if you’re still developing the business plan. Sadly, a majority of entrepreneurs have no exit strategy whatsoever in place. Planning your exit strategy is about making a proactive series of decisions instead of just reacting to unexpected events. “It’s almost like the military: Before you go in, you want to know how you’re going to get out,”
The idea is to put in writing
a) when you see yourself leaving your business
b) how much money you need to walk away with and
c) how you see yourself transitioning out.
An exit plan very simply tells us the end game. Do we want to exit at a particular age? Do we want to exit when the business hits a certain revenue? Do we want to exit when we can sell the business for a certain monetary amount? Do we want to turn the business over to someone to run for us at a certain point in time? The earlier we think about these points and make plans the better chance we have of their success.
When is the best time to make an Exit Plan?
The absolute best time to think out and write down your exit plan is before you open the doors to your new business. In fact, if you have investors or are looking for investors they’ll insist you have an exit plan. They’ll want to know when they can expect their return on investment and how.
But even if you already have an established business it isn’t too late.
If your intention is to exit the business, then under the best circumstances you need five to ten years advance planning. This gives you time to increase the value of your business, make it more attractive to potential buyers, work with your accountant about how to reduce your tax burden and find the buyer you want to lead your business and employees into the future.
Even if you don’t intend to exit your business in the foreseeable future you still should think about, strategize and write down an exit plan for your business. Not only will it give you a wheel and compass for your ship it will also give you peace of mind that should something happen you are prepared.
One thing is for certain, life doesn’t go the way we always want it to and the same goes for your exit plan. It will change over time, so make sure to review it often. Write your exit plan down in a living document and then review it every six months or so; as it changes, make updates to it.
Sooner or later everyone leaves their business. It can be planned, or it can be a surprise. It’s usually the biggest financial event of a business owner’s Life.
Some reasons business owners exit their businesses
- get burned out.
- reach retirement age.
- going through a divorce and need to liquidate the business quickly.
- begin to have health issues.
- feel like they have a job and not the owner of a business.
- lose sight of why they got into the business in the first place.
- want to move on to something else.
- want to enjoy the fruits of their labors.
Reasons to have an Exit Plan
- It allows a business owner a better chance to exit their business on their terms, in their own time frame, and with full value for what they’ve built.
- It allows a business owner a better chance to strategically increase value to maximize the sale price of the business.
- It allows a business owner time to minimize, defer or even eliminate their tax burden.
- It puts contingencies in place for illness, burnout, divorce and even death.
- It allows for the continuation of the business and security for family and employees.
- It gives you a better chance of solidifying your legacy.
Common Exit Planning & Strategies
3rd Party Sale
Selling outright can allow for an easy exit. If you wish, you can take the money from the sale and step out of the company. You may negotiate for equity in the buying company, allowing you to earn dividends. It is also possible to negotiate to stay on for a time period to help run the company and receive a salary.
*Warning: only 5% of businesses listed on BizBen (an on-line web-site for selling businesses) actually sell.
Initial Public Offering of Stock (IPO)
An IPO or Initial Public Offering is when a previously unlisted company offers its shares for sale to the public leading to a stock market listing. IPOs take a lot of time to prepare and can cost anywhere from several hundred thousand to several million dollars, depending on the exchange and the size of the offering. Keep in mind, that the likelihood of your company ever going public is very low, as you’ll likely need to reach into the tens of millions of dollars in annual revenue before you’re an attractive IPO candidate.
Acquisition by competitors / Trade Sale
Other companies might want to acquire your business and keep its value for themselves. Make sure the offered sale price agrees with your business valuation. You may even seek to cultivate potential acquirers by courting companies you think would benefit from such a deal. If you choose your acquirer wisely, the value of your business can far exceed what you might otherwise earn in a sale.
Sometimes, two businesses can create more value as one company. Keeping an eye on your competitors is always a good idea. Keeping an eye on competitors as an exit strategy is a great idea. If you’re looking to leave entirely, then the merger would likely call for the head of the other involved company to stay on and take over your company’s activities. If you want to stay involved, consider staying on in an advisory role.
The dream of many small business owners is keeping their business in the family. It ensures that their legacy lives on and provides a living for their heirs. It can make for a smooth transition by grooming a family successor and it may allow the owner to keep a hand in the business in an advisory (or other) capacity
Fact 1 – Family businesses generate over 50% of the US Gross National Product (GNP)
Fact 2 – Less than one third of family businesses survive the transition from first to second generation ownership. Another 50% don’t survive the transition from second to third generation.
An MBO (Management Buy-Out) occurs when the management-team of a company decide to buy-out the company they work for. The company continues as a private company and investors are able to sell their shareholdings to the MBO team. MBO involves the management team pooling resources to acquire all or part of the business they manage. A Leveraged Management Buyout (LMBO) is similar to a MBO, except that the buyers use company assets as collateral to secure financing.
Sell/transition to employees
Many business owners look to key employees to take over their businesses out of a sense of friendship, or loyalty to those that have worked with the business for many years. Employees also know the business, clients, and suppliers, and there may be advantages related to continuity. Employees seldom have the cash needed to buy the business. Banks are usually unwilling to fund the full purchase price; therefore, the owner often must take a financial risk along with the risk of non-performance of the business.
Build your business so it can survive and thrive without you
It is possible, with an in-depth knowledge of your company and a lot of advance planning to design your business so it can run without you. You need a great management team in place, great employees you can count on, your processes and procedures well thought out, tested, and documented, and the correct Key Performance Indicators (KPIs) to monitor its progress with. You retain ownership and enjoy the annuity.
Let it run dry (Liquidation)
This can work especially well in small businesses like sole proprietorships. In the years before you plan to exit, increase your personal salary and pay yourself bonuses. Make sure you are on track to settle any remaining debt, and then you can simply close the doors and liquidate any remaining assets. With the larger income, naturally, comes a larger tax liability, but this business exit plan is one of the easiest to execute.
5 steps to prepare your small business for an exit
1. Sourcing Buyers
One thing businesses fail to think about is finding buyers for their business. Most owners just assume someone will want to buy their business, which is a huge mistake. According to exits.com, “Only 25% of saleable companies exit.” Keeping a list of potential buyers and or a list of competitors who may be interested in acquiring your business when the time is right is a critical piece of your exit plan.
2. Re-occurring Revenue
Revenue is an important piece of your business exit; not only how much you have of it, but also the form in which it comes into your bank. Subscription-based products and services that produce reoccurring, predictable revenue is attractive to potential buyers. Another smart thing to do with your revenue if possible is to bill automatically, in advance. If all of your revenue is set up as reoccurring payments on the 1st of each month for that month’s service, you will have a very attractive business to acquire.
3. A Good Growth Pattern
Obviously, having a business that has shown good growth patterns is what you are aiming for and what acquirers will want to see. Steady and predictable financial growth is the goal.
You may have some dips in your growth patterns here and there, but as long as they can be explained with an acceptable answer, you will probably be OK. What a buyer does not want to see is erratic swings in your growth.
4. Standard Operating Procedures
If you don’t have a set of detailed standard operating procedures that are written down, you need to develop them. Build your business to the point where, if you get hit by a bus, your business will move forward without any disruption. You want to detail everything everyone does in your organization in your standard procedures.
5. Something Proprietary
Buyers love to invest in or acquire a business that has something proprietary. That doesn’t necessarily mean you have to have a patent on something, although that is huge. You could just have a certain process that is.
Exit Planning Summary
Whilst building, growing and executing on your business takes time and skill, the same applies to strategies on exiting your business. Preparation is the key. Building structures and processes around and inside your business will make it easier to sell the business as a “package” and will also make it more palatable for a potential purchasor.
It may seem like a pain at the time but having your books audited every year even if your a small business will give a lot of trust when it comes time to sell.
Selling my business FAQ
What are the benefits of exiting the business?
Some of the main benefits include an opportunity to exit their business on their terms, in their own time frame, and with full value for what they’ve built, to minimize, defer or even eliminate their tax burden, and allows for the continuation of the business and security for family and employees.
When is the good time to exit?
One’s life circumstances can change any moment and if you feel like you want or need to exit, then the time has come. It is up to you to decide.
How to start an exit planning?
You can start by writing down when you see yourself leaving your business, how much money you need to walk away with, and how you see yourself transitioning out.
Where can I get help with my exit planning?
If you feel overwhelmed with the exit planning, our experts can help you to cope with a wide variety of issues.
Should I have an audit of my accounts every year?
While it may be tedious and time-consuming it’s a valuable process to go through and it also adds validation to your business when you decided to sell.