IE Business Daily Business news for the Inland Empire.
By Michael K. Menerey
10,000 baby boomers are turning 65 years old daily, reports the Pew Research Center. Many of these boomers are small business owners, meaning there will likely be a surge of closely-held businesses coming onto the market for sale over the next several years.
If you are a business owner or entrepreneur planning to exit your company in the relatively near future, this means you should start planning your business exit strategy now. Ideally, a written business exit plan should be created between three and eight years before the desired exit date. Owners and entrepreneurs who follow this timeline for exit planning, and diligently follow their plan, are much more likely to maximize the value of their business and obtain the highest possible selling price than those who don’t.
Factors to Consider in Exit Planning
Following are 9 factors that you should consider as you plan your business exit strategy:
- If you have other ownership partners or investors, you need to have a well-designed and funded buy-sell agreement in place.
- Who will your intended buyer be? If you are highly confident it will be a strategic buyer in your industry, it’s less important that you create a solid management team; the buyer will have its own team.
If you think it will be a third-party buyer, your management team and staff are crucial, because these buyers will not be able to run the business successfully themselves, and you will most likely be gone — if not immediately, then soon after the sale. The management team is paramount.
- If you will be selling to family members and/or your current management team or employees directly or through an Employee Stock Ownership Plan (ESOP), your considerations are similar. You should start identifying and defining their roles now. Do they have the skills and the support staff in place to continue to run the business profitably? If financing for the new owners will be required, help them start getting this in place early to assure your exit.
- What is your business growth plan between now and the time you exit? What sales and EBITDA targets have you documented in budgets and forecasts, which prospective buyers will ask to see? Nothing appeals more to a buyer than historic and sustainable growth. If your business is stagnant and not growing, you will not maximize the sale price. Focus both on sales and EBITDA growth.
- Is your financial house in order? Make sure all records are current, signed and organized, preferably electronically. Make an effort to extend all contracts, leases, loans, etc., if you can do so favorably so the buyer does not come in facing a plethora of expiring agreements. Focus on customer and vendor care — happy and loyal customers and suppliers help ensure success. Make sure all processes and procedures are updated and documented in order to insure a smooth transition and minimize buyer due diligence issues.
- Will you sell the building(s) the business operates in, assuming you own them, or retain ownership and lease them back to the new owners? You should analyze the impact to you personally of including the building in the sale and reaping the sales multiple on higher EBITDA at sale, versus a lower sale price adjusted for the future rent expense, but with a future rental income stream for you personally.
- You should have your financial statements reviewed or audited by a CPA firm for at least three years prior to your desired sale date. This will insure credibility in your numbers and reduce the due diligence time required by prospective buyers.
- You need to decide when and how you will communicate your exit plan to your employees. Communication must be clear, and should include some indication of bonus or compensation plans based on a successful transaction, the likelihood of future employment opportunities and company goals until the sale closes. Proactive leadership will help insure success; keeping employees in the dark creates uncertainty that may create disgruntled staff that can impair or derail a successful transaction.
- Finally, what is your personal strategy after you exit the business? Have you addressed your retirement estate planning, income tax and monthly income needs? Your exit planning needs to address the business, your planned method of exit and your individual aspirations.
Assembling Your Exit Planning Team
One of the keys to successful exit planning is hiring an experienced team of multidisciplinary outsourced advisors, including an outsourced CFO, early on to evaluate your situation and advise on selecting the right exit process. This may include helping create the exit plan and timeline, monitoring progress, and helping address the many issues that will arise during the transition process, including those you will encounter when you start working with business brokers and/or investment bankers to begin the sale process and contract negotiations. Having the team in place will allow you to focus primarily on operations.
Concluding Thoughts
Because there will likely be a surge of closely held businesses coming onto the market for sale over the next 5 to 10 years and competing with you for buyers, you should start planning your business exit strategy now. An outsourced CFO services provider can play an integral role in your exit planning process by helping you create a team. By investing in planning your exit well in advance, you will place yourself above other competing sellers as the best-prepared and most valuable target, allowing you to maximize the sale price and help ensure a smooth transition process.
Mike Menerey is Partner at CFO Edge LLC and can be reached by phone at (909) 931-1354 or by visiting www.cfoedge.com.
