Exit Planning Tools for Business Owners

Joe Gitto

20 Red Flags to Look Out for When Buying a Business

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Buying a business is an opportunity to skip the growing pains of launching a startup. It’s a chance to start with a proven model with customers and cashflow. How can you tell if the prospective business is a genuine investment opportunity or a disguised escape route for a burnt-out owner?

The following is a list of the top five things to consider when prospecting a business purchase – and some red flags for each category so you can recognize trouble a long way away. This list is no way exhaustive and there are many other issues to consider when buying a business. However, nailing these will tip the odds of success in your favor. Here are 20 red flags for buying a business you should look out for.

1. Why the Business is For Sale

Before you fall in love with a business, make sure you understand why it’s for sale. You’ll want to interview the owner about their experience with ups and downs, their efforts to course-correct, and what tactics have been most successful.

Above all, you should be checking to see if you have what it takes to take the business to the next level and why hasn’t the previous ownership attempted this course. It’s not just about if the company could be a profitable investment– it’s about verifying the fit with your skills and resources.

Red flags:


The owner is burnt out or seems to be filling multiple roles
A toxic culture and/or high employee turnover
A poor business plan that can’t compete with costs or competition
An industry that is contracting or being disrupted by technology.

2. Perform Due Diligence

Due diligence will occur after your Letter of Intent has been accepted. It’s a comprehensive process, taking anywhere from 45 days to 9 months. This is the most critical step in the acquisition process. This is your chance to get “under the hood” and see how the business operates and to validate what you have heard from the owner in the prior discussions.

Due diligence includes:

Verification of sales and cashflow
Key employees
Concentration risk – clients and key suppliers
Financial/Tax Review
Asset Consideration
Legal Review
Operational Efficiency
Company debt
Real Estate status – lease expiring, property owned by the owner.
Inventory – obsolescence, turnover
Environment Concerns

Red flags:


Findings are significantly different than similar companies
The business model is overly complicated
Report results seem unlikely
Cultural concerns

3. Financial Review

Although briefly discussed in the previous section on due diligence, this is where you will determine what the financial opportunity of acquiring this business will be. It’s critical to partner with an independent and qualified CPA / financial professional to ensure that the story the numbers are telling are accurate. It is your responsibility to verify the results being provided to you.

You’ll want to dig into:

Profit and Loss (P&L) Statements
Balance Sheet
Cash Flow Statements
Tax Returns
Accounts Payable
Accounts Receivable
Sales history

Red flags:


The owner claims that the company makes more than the books reflect
Customer concentration
Equipment will need to be replaced soon (significant early expenses)
Account receivable and Accounts payable aged past 90 days Lack of budget and rolling 13 week cash forecast.

4. Get Clear About the Industry’s Future

You’ll also need to research the future of your new company. Is growth likely? What are the barriers to entry? Competitive landscape? Is the industry fading in relevance, being disrupted by technology, requiring significant product development to stay alive?

Access to industry research and speaking with industry experts is important. Talk with future competitors under the guise that your are considering becoming an investor in the industry. Seek out recent transactions and what the multiples are. How have the new owners faired post-acquisition.

Red flags:


The owner claims to have little competition
Inability to adequately explain declines in sales or margins
The owner reports having a hard time keeping up with established competitors
The owner mentions continuous new competition
The industry isn’t flexible to modern innovations

5. Reputation Matters

A good reputation isn’t just nice to have– its value is measured in dollars. Companies with a good reputation benefit from higher profits, free marketing, and better hiring ability.

Clean branding has never been more critical in an age of consumer determination to buy socially, ethically, and environmentally friendly. With social media and reviews in the driver’s seat, it’s crucial to work with intact brands.

Remember, brands don’t get a redo just because ownership changed.

Red flags:

Poor social media or news coverage
Significant poor reviews
Mistrust in target consumer base

Joe Gitto, CEPA is an accomplished senior Finance, Sales and Operational Executive, Entrepreneur, Coach, Thought Leader, and Board Member with more than 25 years of success in various industries. He is the Managing Member of Blue Sky Exit Planning Services.

How to Add Millions to The Value of Your Business – Using EBITDA Adjustments

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As a 5-time entrepreneur who has helped several businesses increase their value, I know what it takes to run a successful business. If you’re trying to figure out what your business might be worth, it’s helpful to consider what acquirers are paying for companies like yours these days.

According to Oberlo, the number of small businesses increased from 32.5 million in 2021 to 33.2 million in 2022. This trend shows no signs of slowing down as more and more people are taking their first steps into becoming an entrepreneur.

In addition to new businesses, many boomer business owners will be heading into retirement within the next decade, adding even more competition for the attention of buyers.

With both of these factors in mind, it is normal for more established organizations to wonder if the increase in new competition will have an impact on the value of their business when it comes time to sell.

While this can be intimidating, there is a process a business owner that is looking to retire can take to ensure a profitable exit.

Obsessing Over Your Multiple

If my 25 plus years of experience has taught me anything, it’s that a business trades for a multiple of your pre-tax profit, which is Sellers Discretionary Earnings (SDE) for a small business and Earnings Before Interest Taxes, Depreciation and Amortization (EBITDA) for a slightly larger business.

This multiple can transfix entrepreneurs. Many owners want to know their multiple and how they can increase its value.

After all, if your business has $500,000 in profit, and it trades for four times profit, it’s worth $2 million; if the same business trades for eight times profit, it’s worth $4 million.

Obviously, your multiple will have a profound impact on how much you will realize on the sale of your business, but there is another number worthy of your consideration as well: the number your multiple is multiplying.

How Profitability Is Open to Interpretation
Most entrepreneurs think of profit as an objective measure, calculated by an accountant, but when it comes to the sale of your business, profit is far from objective. Your profit will go through a set of “adjustments” designed to estimate how profitable your business will be under a new owner.

This process of adjusting—and how you defend these adjustments to an acquirer—is where you can dramatically spike your company’s value.

How to Increase Your Companies Value in Time for Retirement with EBITDA Adjustments.

Let’s take a simple example to illustrate. Imagine you run a company with $3 million in revenue and you pay yourself a salary of $200,000 a year. Further, let’s assume you could get a competent manager to run your business as a division of an acquirer for $100,000 per year.

You could safely make the case to an acquirer that under their ownership, your business would generate an extra $100,000 in profit. If they are paying you five times profit for your business, that one adjustment has the potential to earn you an extra $500,000.

You should be able to make a case for several adjustments that will boost your profit and, by extension, the value of your business.

This is more art than science, and you need to be prepared to defend your case for each adjustment. It is important that you make a good case for how profitable your business will be in the hands of an acquirer.

Some of the most common EBITDA adjustments relate to:

Rent (common if you own the building your company operates from and your company is paying higher-than-market rent).
Repairs and maintenance.
Start–up costs.
One-off lawsuits.
Insurance claims.
One-time professional services fees.
Lifestyle expenses.
Owner salaries and bonuses.
Family members wages and benefits.
Non-arms length revenue or expenses.
Revenue or expenses created by redundant assets.
Inventories

Your multiple is important, but the subjective art of adjusting your EBITDA is where a lot of extra money can be made when selling your business.

Joe Gitto, CEPA is an accomplished senior Finance, Sales and Operational Executive, Entrepreneur, Coach, Thought Leader, and Board Member with more than 25 years of success in various industries.

Exit Strategies for Small Business Owners: A Summary Guide

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There comes a time for everyone to move on from the business they’ve created– some happier reasons than others. But even if you’re just starting, having an exit strategy for your business will help prime you for success, rather than leaving value on the table when the time comes.

This guide will walk you through the signs to sell, the basics of valuation, options for selling your business, and tips on adjusting to life after the sale.

Before you are ready to sell, it’s important to walk through this process with an experienced exit planner. This will best prepare you, not just for selling your business, but ensuring your personal finances are in order and preparing for life afterwards as well.

Step 1: Signs it’s Time to Sell Your Small Business

It’s essential to be aware of the signs it may be time to sell your business long before it happens. Selling something you’ve created from the ground up can be emotionally and mentally draining. By preparing yourself for the signs it’s almost time to move on, you can save yourself undue stress and time wasted and be prepared for the exit journey.

You no longer enjoy going to work.
Running a business is deeply involved work, taking up a lot of emotional, physical, and mental space. That’s alright as long as you typically enjoy the work you’re doing– but if most days bring dread, you should evaluate your position.

Ask yourself, if you could walk away from your business and be financially stable would you? If the answer is yes, you might be looking to sell.

You feel you are no longer a good match for the company’s future.
Companies evolve, and you may find that you are no longer equipped to be the visionary. In rapidly changing industries, keeping up with the latest innovations can be exhausting. The investment required to stay technologically competitive can be daunting, and a risk you may not want to take later in life.

If you no longer feel Like you can keep up with the demands your business needs to stay relevant, it might be time to sell.

You are bored.
On the other hand, you may find that you’ve learned your business so well that it is no longer stretching you. Your industry has been the same for decades and it will continue to be the same for decades to come.

If you’re someone who needs to be challenged to be fulfilled, selling your business and moving onto another venture might be the solution.

The industry is in decline.
Industries ebb and flow, and many booming fields have died. So it’s critical to have an accurate pulse on the future of your industry so you can ride out profitably rather than leave a business no one wants to buy a few years too late.

Businesses in declining industries still remain profitable for years to come, but it’s important to understand the right time to leave.

There are more exciting opportunities available.
Opportunities are everywhere for both you and your company. Perhaps you are ready for your next venture, or your company has the chance to leap ahead through a merger or acquisition.

Your business is failing.
While not ideal, sometimes it’s time to sell a business because it’s simply not working out. There is nothing wrong with selling a business that isn’t turning a profit. There are a variety of factors that impact the success of a business.

Lack of industry experience, lack of funds, among other aspects that are out of your control can hinder a business ability to succeed.

In this case, selling your business to someone who can fill the gaps can see that business thrive in a way that you might not have been able to.

Step 2: Getting a Business Evaluation Before Selling

Once you’ve determined you need to sell your business, it’s time to get your affairs in order and determine a fair price or outcome. Whether you’re selling for a buyout, merger, IPO, or another method, it’s critical to know what the business is worth.

Seller’s Discretionary Earnings (SDE)
Most small businesses will value their business using SDE rather than EBITDA because small business owners often have a more personal stake in their company’s finances. Like EBITDA, SDE represents the company’s net profit with a lens for the future owner to understand how they will benefit from the sale.

Organize Finances and Reports
It is important to make sure your books are kept up to date and closed regularly. Keeping your books on a tax basis will not help you when it comes time to sell. It is a good idea to have an independent CPA firm “review” your financials for the 3 years prior to when you plan to sell. An independent accountants review gives the buyer more confidence in the numbers.

Compare Other Businesses in Your Industry
Before meeting with potential buyers, know what your business is worth by industry standards. Intangibles like a promising future (or a declining industry) can significantly impact the real value of your business.

Boost Your Business Value to Maximize Returns
Before selling, there might be gaps in your business that need to be addressed. Depending on the issue, negative aspects of your business can impact the overall return you will receive. Boosting sales, updating equipment, having solid management in place, and key employees under agreements after you leave are all initiatives that will increase the value of your business in the eyes of a buyer.

Step 3: Looking at Your Selling Options

Now it’s time to consider the methods of sale available to you. Some offer you an opportunity to keep a hand involved with the business, while others allow for a clean break. Pick your strategy carefully based on your values for life after the sale.

Merger or Acquisition: Sale to another company. This route offers price negotiation, but is a slow process with only 20% of deals close on average.
Sell Stake to Partner or Outside Investor: Choose your successor through a buyout of shares from someone internal (can be great for a smooth leadership transition and culture) or an outside investor (excellent for bringing in seasoned talent and disrupting an unhealthy company culture).
Create an initial public offering (IPO): a potentially high payout, but is an expensive and complex process. Most small businesses never achieve the required scale for a successful IPO.
Pass business to family members: Create a legacy that continues to provide for your family while giving you a chance to move to the next big thing. Tax laws will vary for inheritance, trusts, and other methods.
Liquidate: Officially dissolve the business. This is unlikely to be a profitable route.

Step 4: Adjusting to Life After Selling Your Business

Many business owners feel a sense of “now what?” after selling their business. Those who do not have their next adventure in mind are at risk of feeling depressed or directionless. So while it’s difficult to move on, begin fostering new ideas before the final sale so you can avoid feeling that loss.

Prepare for change in income stream.
Your finances will likely change significantly with the sale of your business. Most business owners underestimate how much the business “supports” their lifestyle. It is imperative that you work with a Financial Planner and have clear visibility into your financial future.

Give time for reflection and potential grief.
The sale of your business is a natural time for reflection on a significant era of your life. Give yourself time to process the lessons you’ve learned, the hard times you navigated, and the successes you built. Even with a profitable sale, you may experience symptoms of grief.

Spend time with friends and family.
Many business owners work far more than 40 hours a week. Set aside time to reconnect with friends and family while you don’t have anything on your plate.

Be a “whole person.”
Remember that “business owner” is simply one aspect of who you are and what you have to offer. Keep hobbies and relationships alive, explore new things, and reflect on your values of a good life.

Start the next venture.
Whether you’re on to the next company, charitable ventures, or retirement, give yourself something to look forward to before you finalize the sale of your company.

Joe Gitto, CEPA is an accomplished senior Finance, Sales and Operational Executive, Entrepreneur, Coach, Thought Leader, and Board Member with more than 25 years of success in various industries.