By Soeren B. Aarup
You have spent countless hours building and growing a business to provide for your lifestyle, but what about life after your business. What are your plans and has your business built enough wealth for you to continue your lifestyle?
What is your Exit Strategy for your business?
There are different options for an Exit:
- Run the business until you die at your desk.
- Semi-retire and hire someone to run the daily business.
- Liquidate the assets and close the business, either voluntarily or involuntarily.
- Sell the business.
Today I focus on the latter option, sell your business.
When considering the sale of your business it is important to define goals and prepare an exit strategy, as there are different options for selling a business. (e.g. Financial buyer, Strategic buyer, ESOP or a Family member). When should you create an exit strategy? We all know what the late Stephen R. Covey said, “Begin with the end in mind!” He went on:
“To begin with the end in mind means to start with a clear understanding of your destination. It means to know where you’re going so that you better understand where you are now and so that the steps you take are always in the right direction.”
With a clearly defined exit strategy, you are not leaving your future to chance. You will have a goal for how much in after-tax proceeds you need from your business to finance your post-business lifestyle. An expert in business valuation will help you assess that amount. The rest is just math. A strategic exit plan can help you position your business to maximize your net after-tax proceeds.
It could take 12-24 months of preparation or even longer, before you are adequately positioned to go to market. To help maximize value, you will need to:
- Build a diverse customer base,
- Create recurring revenue streams,
- Ensure consistent and healthy cash flow,
- Demonstrate scalability and
- Show a strong competitive advantage.
Analyze your processes and look for ways to increase operational efficiency, reduce expenses and control inventory without affecting your operations. The goal is to ensure your business is attractive to a large pool of potential buyers. The more you think like a buyer, the better you will perform as a seller.
The major reasons deals don’t happen is due to:
- Poor financial reporting / financial records, and
- Declining financial performance.
- Elongated due diligence by the seller necessitated by the fact that you the seller were not prepared for an exit transaction.
Due Diligence – what is that? That is where a prospective buyer’s team of lawyers and CPAs probe, undress, and otherwise violate your business records in order to evaluate your business. When evaluating a business, a prospective buyer expects the records and facts to be well organized and documented in what is known as a data room. Preparing the facts and records and answering most questions in advance helps build trust with a prospective buyer. At the same time, it reduces the timeline for the buyer to complete their due diligence, increasing valuation and the probability that the deal will get done.
When you have decided that you want to formulate an exit strategy, it is vital that you avoid distractions and keep the company growing. The best way to do this is to assemble a team of qualified experts who know the process and can help you maximize your business value. Experts on this team include a tax CPA, CFO, M&A lawyer, a business broker/investment banker, and others. Whatever you do, don’t try to do it all yourself. You don’t have the bandwidth or the expertise, and you only get one chance at this.