5 things you should consider before heading for the exit
The five things you should consider before retiring or selling your business.
No matter how much they love their businesses, there comes a time when business owners start to think about how and when they will retire, or sell your business for other reasons.
Typically it’s after many years in business, but that’s not always the case. Many owners put an exit plan in place before they even open their doors. Regardless of whether you’ve poured years of blood, sweat and tears into your business or you’re just starting out, here are five things to consider when formulating your exit plan.
“The Handover” is an original Chase series that aims to help business owners think more strategically about succession planning.
1. Determine what your business is worth
What your business is worth to you is often different from what it will be worth to someone else. To ensure that you don’t overprice or underprice your business, you may want to get a formal valuation from a third-party valuation company, broker or mergers and acquisitions advisory firm. While there will likely be a fee, this service could save you money in the long run by helping you determine a realistic valuation for your business and adding credibility to that price for any potential buyers.
Many factors go into the valuation of a business, including income, assets and recent comparable sales (also known as comps) of similar businesses in your area. In addition to these quantifiable items, many potential buyers will also place value on a business’s scalability, strength of management, market leadership and customer concentration. Keep in mind that valuations fluctuate with the market, so using a valuation from a decade ago — or even one year ago — may not be an accurate representation of the current value of your business.
Business owners often think about making their exit when business is at its low. But when it comes to valuation, they also consider getting out when it’s high.
2. Get your docs in a row
Most business owners don’t wake up one morning and say, “I’m going to sell my business today.” Aside from the fact that it’s a big decision, it takes time to gather what’s needed. You know all those tax returns and earnings statements your accountant told you to hold on to? Well, it’s time to pull them out.
Regardless of how much the prospective buyer likes you and your business, they’ll want to see proof of its performance. It’s common that buyers will request three of four years of business tax returns, earnings statements and balance sheets as well as any future projections.
If you have these items readily available, kudos to you. If not, it may take a little time to gather them. Either way, once you have everything, it’s always a good idea to review all the documents with your accountant or other advisors.
If you’re including furniture, equipment or inventory in the sale, you’ll also need to provide a list of these items to the prospective buyer. Many buyers will also want to see copies of a year’s worth of utility, equipment and other recurring expenses so that they can understand the seasonal fluctuations and plan ahead.
Depending on the type of ownership transfer, you may also want to create a succession plan for how you want the business to continue. This is especially important if you are passing on the business to a family member and want them to retain the same values and integrity that you built your business upon.
3. Prioritize your exit options
Partners may come and go. Your family may grow. A competitor could suddenly want to buy you out. Whatever the reason, your business exit plan may change over the years. That’s why it’s important to understand your options for an exit:
- Transfer ownership within the family: One advantage of having a child or other family member as a successor is that they often understand what’s involved with the business and can be groomed over time. It’s also a great way to carry on the legacy you built or inherited and preserve family values and name.
- Sell it to a new buyer: This exit strategy is probably the one most people think of when selling a business. You sell to a new buyer, and you may or may not have any involvement after the sale. Those details will be worked out during negotiation of the contract.
- Sell your shares to an existing partner: It’s not uncommon for partners to buy each other out.
- Offer employee(s) a buyout or employee stock ownership plan: Your employees are an important asset business’s greatest assets, and oftentimes they’re also interested buyers.
- Consider a merger or acquisition: When two businesses share the same offerings, goals or target market, it’s not unusual for one to want to merge with or acquire the other.
- Shut it down and liquidate your assets: If you want to cut all ties with your business, this option leaves no room for interpretation. Once you sell off all the assets and pay off any debts and partners/shareholders, you’re done. But one thing to keep in mind effect on employees, customers, vendors and even your community.
4. Think about how you’ll get paid
How do you realize the value you’ve built? There are a variety of ways to get compensated for the sale of your business. Keep in mind that each has different tax implications. Whichever way you choose, it’s always important to seek the advice of an attorney, accountant and financial advisor.
- Cash: As you are well aware, nothing is guaranteed in business (or in life). A lump-sum cash payment upfront ensures that you get the money you have coming, without relying on the success or future earnings of the business you just sold.
- Seller financing or seller-carried note: When you finance all or part of the deal yourself, you may open up a new pool of prospects who can’t afford to pay the total upfront in one lump sum and don’t qualify for traditional lending. This option could lead an ongoing income stream for you that includes payments and interest.
- Earnout: With this option, you agree to take a lower price on the sale of your business in exchange for a provision that compensates you financially (usually a percentage of earnings or sales) if the business meets certain goals in the future.
- Stocks: This option is for C or S corporations (or LLCs taxed as a C or an S) that can buy and, sell stock. The details of the transaction can vary are worked out during the negotiation of the contract.
- Offer of employment: This option can be a win-win for owners who no longer want the responsibility of running the business but aren’t quite ready to retire and buyers who could use a little help getting up to speed.
5. Prepare psychologically
No matter how much stress, frustration or sleeplessness your business may cause, it’s still your baby. Deciding to leave it behind is never an easy choice. In addition to preparing yourself financially and operationally, you also must prepare yourself mentally for this next chapter. A little planning can go a long way.
Think about what you’ll do with your time. Talk with people who have been there and done that. Plan a trip. Get started on that project you’ve been putting off. And before you sign the final papers, think about whether you want to stay on in some capacity. Read the Chase for Business series “The Handover” for information and tips on succession planning.