Exit Strategy
EXIT STRATEGY FOR BUSINESS OWNERS
By Jeff Moody, CBI
EXIT STRATEGY. You may have heard the term used in relation to war, and troop deployments. But, much closer to home, it is a term used to describe planning for what happens when you no longer own your business.
Every situation is different and requires a plan that is tailored to that situation. Sometimes there will be family members who will take over the business. While this may be the easiest, it requires the same kind of planning needed for any exit strategy. If the family members are not interested in running the business or not qualified, you need to look at the next option.
Selling your business as a going concern can take many forms, from selling out to a partner, to selling to an individual or a private equity group. There are many considerations that we will cover briefly in a minute.
You can liquidate the business and sell off the assets. This is much less desirable, because you will not be able to get the maximum value. But, this happens more often than one would think. Without a plan, many business owners run the business until they get tired, old, or both, and just decide to shut it down.
The least desirable option is to file for bankruptcy, if all else fails when the company has substantial debts. It may happen when the owner didn't plan to fail, but failed to plan (too busy running the business), and encounters health or other problems without an exit strategy.
We will continue, looking at what is necessary to complete either of the first two more desirable options. The first thing that must be done is to get a business valuation. Many business owners think they know what their business is worth, and don't want to spend the time and money to do a valuation. This can be a big mistake, a price that is too high may keep the business from selling, if it is too low, money will be left on the table. Because a valuation gives the fair market value at a certain point in time, this is a necessary first step in your exit strategy plan. The business may have been worth more (or less) in the past, and likewise may have a different value in the future, but you need to know what it is worth now. With this number in hand, you can plan how to maximize your selling price. It is important that the business be valued by a certified, third party, experienced appraiser.
The next step in the exit strategy process is to determine your time frame for leaving the business. You are the only one who can answer this question. The time for exit is greatly influenced by the type of buyer you would prefer to have. A sale to a business partner may happen quickly once the valuation is done, and agreed to. A sale or transfer to family members or employees might require several years of training, planning, and transition. This may require your presence for a long period of time after the transfer. If you want to sell to an outsider, there are two main considerations. What is the market of potential buyers now, and are you satisfied with the valuation you have. Some times are much better than others to sell a business. The type of business also influences this. If you would like to get more for your business, you may have to spend some time improving its financial picture, as this is the major driving factor in value.
Now that you have completed the first two steps, you have to decide how to sell your business. You can sell it yourself, or hire someone to help you to sell it. If you know who you are selling your business to, you can probably handle the sale yourself. You should still use the services of your accountant and attorney to ensure that important details are covered. If you are interested in getting the highest and best price for your business, you should secure the services of a qualified business broker. Many people will try to help sell your business, so how do you choose? If there is real estate included in the sale, the broker should be licensed to sell real estate. If you are liquidating your business assets and selling the real estate after the business closes, this may be the only qualification needed. I would suggest that you use someone who concentrates on commercial real estate. To sell the business as a going concern, you need someone who specializes in business transfer. If your business is large enough it may fall into the category of Mergers and Acquisitions (M&A). These transactions require professionals knowledgeable in the process. You do not want to negotiate alone with a large company, with a big staff, who has done this many times before. When you interview a broker ask questions about experience, previous transactions, and certifications. The professional organization for business brokers is the International Business Brokers Association (IBBA). The professional designation of the IBBA is the Certified Business Intermediary (CBI). There are only eight CBIs in the state of Alabama. You can be sure that these people have the experience and have passed the examinations to demonstrate competence in the field. A CBI is also more likely to know about private equity groups, and other international buyers for your business. The best buyer has more than just a financial interest in buying a business.
If you have questions about any part of this process, or if you would like to see a sample business valuation, please contact the author.
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