Exit Planning Tools for Business Owners

entrepreneur

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.

Business Succession Planning Is There Life After Death?

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Consider this scenario: You’re part owner of a thriving small- to medium-sized business. You handle certain key responsibilities and rely on your partner to handle others. While your partner is away on business, the phone rings. The shaky voice at the other end of the line informs you that your partner has been fatally injured in a car accident. You’re grief-stricken. At the same time, you realize many people—you, your family, your partner’s family, your employees, customers, and creditors—depend on the uninterrupted continuation of your business. You know you should have planned for this. . .but you just never found the time.

What If I Wait?

What if I wait? Is this a situation you secretly dread the possibility of facing because you’ve never “found time” for business succession planning? Once tragedy strikes, it can be the worst time to deal with these issues. Under some circumstances, it may be too late. Consider the following potential risks you could face without a proper business succession plan in place.

An owner’s unexpected death may jeopardize the long-term viability of a company, whether it is a sole proprietorship, partnership, or corporation. For instance, loans may be called, or work in progress may be put on hold until a replacement can be hired. In the meantime, customers may gravitate to your competition, making it difficult to win them back.

Moreover, once a business is in crisis, selling a deceased owner’s interest may result in the surviving spouse or family members settling for a price that is less than fair market value (FMV). Since stock or partnership interests in a closely-held business are not publicly traded, their value is not established without a business succession plan.

Finally, although a deceased owner’s estate plan may have made sense for his or her estate, it could spell disaster for the business. For example, if the company is an S corporation, and the trustees of a family trust become stockholders in the business, an inadvertent termination of the S corporation election may result if the trust does not qualify.

Secure Your Future

A business succession plan helps reassure all parties the business will continue to operate. It establishes a monetary value for each owner’s business interest before the need arises. It also helps prevent problems by coordinating each owner’s estate plan with the business. One of the key components of a business succession plan is a buy-sell agreement.

A buy-sell agreement is a contract that creates a market for a deceased owner’s business interest. It obligates the owner’s estate to sell his or her shares for a predetermined price to partners or shareholders (a cross-purchase agreement); to the business itself (an entity agreement); or to both (a hybrid, or “wait and see” agreement).

Life insurance is commonly used to help fund buy-sell agreements. It provides tax-free money at the owner’s death, and can also help fund a buyout at retirement or in the event of a disability. Points to consider in choosing a policy include the size of the death benefit; the flexibility to change the death benefit as the business’s valuation changes; and the size of the cash value component. Also of importance are the policy’s ownership, beneficiary designations, and endorsements.

Smart Moves Help Beat the Odds

Relatively few closely-held businesses pass to the next generation. A demanding schedule may lead to procrastination. However, with so much riding on a proper business succession plan, investing the time to prepare one now—and to review it periodically—may be one of the smartest business moves you’ll ever make.

Keep in mind you’ll need qualified legal, financial, and insurance assistance in establishing your buy-sell agreement.

Mark Hegstrom is Certified Exit Planning Advisor and helps business owners to plan for what may be their single largest lifetime transaction: the transfer of their business. Get started by completing an exit readiness Assessment for yourself. Mark is Managing Partner at Business Owner Succession Strategies (BOSS). He currently serves as President of the Exit Planning Institute -Twin Cities Chapter.
 

Hunting vs. Farming

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At the family gathering, you are being introduced to a distant cousin you haven’t seen since childhood. The introduction usually includes your status as a business owner. “Do you remember little Cousin Bobby? He owns his own company now.” Or you hear it as you pass a conversation; “There goes Rebecca. You know, she has her own business.”

 You know what they are thinking. It may be the somewhat awed tone of being in the presence of success, or a “Who would believe it?” skepticism. When you are a business owner among non-owners, the undercurrent of envy and admiration comes from certain commonly held beliefs about the lifestyle of a business owner.

 You pay yourself as much as you want. As the holder of the checkbook, you can just decide how much salary you need, and take it. After all, if you determine other people’s compensation, so you determine your own, right?

 You only work as much as you want. No one tells you to be in the office by a particular time. No one orders you to stay at your desk until a deadline is met. You can’t get fired for leaving early. You don’t have to accrue vacation. If you work a lot of hours, it’s probably just because you like money so much, and want more. (See belief number one, above.)

 You only do what you want to do. That’s why you have employees. You can pay people to do whatever you don’t like to do. You write your own job description, as well as everyone else’s. No one is crazy enough to write a job description for themselves for a job they wouldn’t want to do! (Are they?)

 Of course, you are probably smiling right now. We know what it takes to start and build something that achieves that level of freedom. It can take years to get there, and it’s seldom an easy road. Many of us never make it that far.

 But it could be true. The vision other people have of an ideal entrepreneur’s life isn’t wrong, it is merely miss-timed. The entrepreneur always believes that such a lifestyle is in the future, it just isn’t here yet. It will just take a lot of work, a lot of talent, and at least a modicum of luck to make it happen.

 It should be true. Along the way, however, many (if not most) entrepreneurs stall in the  “lots of hard work for inadequate reward” stage of building a business. It happens because as the business grows, they are drawn away from what they enjoyed the most, from what they were best at, and into what the business demands that they do. They become farmers.

 Management is farming. Balancing the checkbook is farming. Paying the rent is farming. Locking up the business at night, or opening it in the morning is farming. Purchasing supplies is farming. Writing procedures is farming.

 Bringing in new sources of revenue is hunting. Finding and training great employees is hunting. Closing deals is hunting. Outmaneuvering your competitor is hunting. Motivating people to excel is hunting.

 As an entrepreneur, you owe it to your company, your employees, your customers and yourself not to get tied down in farming activities. You started your business to do what you do best- not so that you could teach yourself a set of skills that you have little inclination to learn.

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