Exit Planning Tools for Business Owners

selling a business

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.

What is a Certified Business Valuation and When Do I Need One?

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A Certified Business Valuation is a comprehensive assessment conducted by a qualified professional to determine the fair market value of a business. It involves a systematic analysis of various factors such as financial statements, industry trends, market conditions, company assets, intellectual property, customer base, and other relevant aspects to estimate the worth of a business.

You may need a Certified Business Valuation in several situations, including:

Selling or Buying a Business: When you’re involved in a business sale or acquisition, a valuation helps determine a fair asking price or offer, ensuring both parties understand the business’s value.

Obtaining Financing: When seeking a loan or financing for your business, lenders often require a valuation to assess the value of the company and its ability to generate cash flow to repay the loan.

Partnership Dissolution: If you’re part of a dissolving business partnership, a valuation is essential to determine the fair value of each partner’s share and facilitate a smooth division of assets.

Estate Planning: Business valuations are necessary when planning for estate taxes or distributing business assets as part of an inheritance. A valuation helps establish the value of the business for tax purposes and ensures a fair distribution among beneficiaries.

Shareholder Disputes: In case of disagreements among shareholders, a valuation can be conducted to determine the value of shares or ownership interests, aiding in resolving disputes or facilitating a buyout.

Financial Reporting: Valuations may be required for financial reporting purposes, such as complying with accounting standards or fulfilling regulatory requirements.

Litigation or Dispute Resolution: During legal proceedings like divorce settlements, bankruptcy, or insurance claims, a certified valuation can provide an objective assessment of the business’s value, serving as evidence in court.

It’s important to note that the specific circumstances and requirements for a Certified Business Valuation may vary based on jurisdiction and the purpose for which it is being conducted. Consulting with a qualified business valuator or professional accountant can help you determine when and how to obtain a valuation tailored to your needs.

Pat Ennis is the President of ENNIS Legacy Partners. The mission of ELP is to help business owners build value and exit on their own terms and conditions.

Delegation and Depth – Company Readiness for Exit

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Delegation and depth are critical when presenting your business as a buying opportunity. For many business owners, exit planning means getting the company ready for sale to a third party. There are a number of approaches to enhancing preparedness for a third-party sale.

Assessing Readiness

Some planning software products begin with a comprehensive survey of the owner’s impressions of readiness. Note that we say “impressions.” A Likert scale questionnaire that asks a client to rate their understanding of a statement and its possible implications with questions like “How confident are you that you know the value of your business?” and a ranking from “no understanding” to “extremely well” often creates more questions than answers.

If an owner chooses “Fairly well,” for instance, does that mean he knows the value, or that he is fairly confident that he thinks he knows the value, or that he is really confident that he knows an approximate value? Nonetheless, some advisors will begin to build a plan around such subjective answers.

In fact, many systems take these subjective answers and use them to produce a score and a subsequent evaluation with a dollar figure for the presumed worth of the business. Regardless of the accuracy of the owner’s responses, they have created a line in the sand regarding value.

Keeping “Score”

The next step is often to assess different areas of operations. Depending on the expertise of the advisor, this may focus on operating efficiencies, sales processes, marketing approaches, financial record keeping or product and customer mix. Then the advisor runs a second evaluation, presuming that these areas have a higher score.

All this is intended to lead to one question. “Would you rather sell your business for $7,000,000 or for $12,000,000?” I know very few owners who would have the temerity to choose the first option, whether they have personal enthusiasm for embarking on a reorganization of their business or not.

The methodology is legitimate. There is ample evidence that improved operations and greater profitability lead to a higher selling price. It may, however, create a scenario where the owner is boxed into the strategy that works best for the advisor, regardless of whether it matches the client’s objectives (“Get out as soon as possible,” for example) or the company’s capabilities.

Delegation and Depth

The first issue, an owner’s objectives, should be addressed by deeper discovery. That is what we preach and teach with our ExitMap® tools. The second, company readiness, is more a matter of delegation and depth.

delegation and depthNo business can embark on a comprehensive improvement process without a management team to implement it. That’s why we address Owner Centricity™ as the only area of company readiness that matters in the discovery phase of every engagement. If the client is already overwhelmed with personal responsibilities, new initiatives will just add more to an already over-full agenda. That’s a recipe for failure.

We map out the management team starting with the owner’s responsibilities. Then we add those employees who are next in line for those duties, along with a 1, 2 or 3 score. One indicates that the employee is fully ready to assume the day-to-day activities of the job. A two means that the employee is generally familiar with the area, but not ready to assume primary responsibility. A three indicates that there is no knowledge or capability for this area. A 3 is also used when there just isn’t anyone available to train.

Company Readiness

Diagramming the management team in such a depth chart permits a far more comprehensive look at which improvements are possible now, and which will require additional training or recruiting. It also gives the advisor a better understanding of the areas the owner will have to delegate to make the business more saleable.

In operational analysis, the capabilities of the management team are the principal determinant of the company’s readiness to grow.

The owner’s willingness to discuss such delegation is by far the best indicator of his or her preparedness for any value enhancement efforts. 

John F. Dini develops transition and succession strategies that allow business owners to exit their companies on their own schedule, with the proceeds they seek and complete control over the process. He takes a coaching approach to client engagements, focusing on helping owners of companies with $1M to $250M in revenue achieve both their desired lifestyles and legacies.

Focus On Net Proceeds And Not Just Sale Price When Selling Your Business

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John was excited as “today is the day!” Twenty-five years ago this month he had started his home remodeling business with a truck and a tool belt, and today at 3pm he was going to the deal table to sell his business to a much larger remodeling company. It would be a strategic purchase for the buyer who was willing to pay a premium with a goal of expansion in the region. With the check received today, John knew he could now do everything he and Kim had thought about doing for years — travel, more time with the family and for hobby’s and other interests they both enjoyed.

The amount received actually exceeded John’s “number”, and hence, he and Kim spontaneously pulled together a celebration dinner with family and a few close friends at their favorite restaurant. John had done a great job through the years building a “saleable business” focusing on a strong management team, strong financial performance, a plan for growth, up-to-date systems and processes and other value drivers which and now he was reaping the rewards. There was indeed much to celebrate!

Fast forward, six months later: John has come to realize that his number needed to be quite a bit larger than what he had originally calculated. In whatever way he had performed his calculations, he failed to consider to the extent needed, or at all, the following important factors in the equation:

• Of the $10 million in proceeds, he was going to net approximately $6 million after these charges/expenses:

o Transaction and professional fees.
o An asset sale was negotiated and there was income tax on some asset depreciation recapture.
o $1 million in business debt needed to be repaid.
o Capital gains and affordable care act taxes.
o Miscellaneous expenses including “stay bonuses” for two key employees.

John was in a small percentage of small business owners who have built a saleable business and actually sold it for their “number”. For that, he is to be commended and congratulated. At the same time, John was now experiencing much regret and was actually concerned about his financial ability to do everything he and Kim had planned on. What could have John done differently when planning for this most significant event? Worked with his exit, financial, transaction, and tax advisors well in advance of the sale in calculating the real number… net sale proceeds…and whether or not he and Kim could do all they wanted with that number.

Pat Ennis is the President of ENNIS Legacy Partners. The mission of ELP is to help business owners build value and exit on their own terms and conditions.

Prepared for 2023 – Is This the Year to Exit?

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What does being prepared for 2023 mean for business owners who are approaching, at, or already beyond normal retirement age?

It’s become fashionable to pontificate about the “inevitable” recession in the coming year. There is an argument for not talking ourselves into making it happen. Unfortunately, there are indisputable reasons why it is going to occur regardless of whether we discuss it or not.

Inflationary stimulus (including $6 trillion of ”quantitative easing”) in the US, combined with over-dependency on Russian gas supply in Europe and falling industrial production from COVID lockdowns in China have created the proverbial slow-motion car wreck for the world economy. All three will come home to roost for the world’s major markets in 2023.

What will happen?
Just as the result of these failures in leadership is eminently predictable, the impact on businesses in transition is equally plain.

Company valuations will decline. Inflated multiples fueled by low interest rates for leveraged buyouts have already disappeared. If you are planning your retirement around the value of a year or two ago, it is time to reassess.

A corollary to declining multiples will be a lack of financing. Market conditions directly impact the availability of acquisition funding. Already, Wall Street has seen a 90% drop in IPOs.

Running a business will get tougher for some time. The ”Great Resignation” is actually only half driven by increasing worker mobility. The other half is from Boomer retirements. As employees seek a counterbalance to inflation, staffing will be an even bigger issue than sales volume.

Many owners will look back at 2022 as the year they finally decided that enough is enough. Owners overcame the dot-com crash, 9/11, and the Great Recession. Now a combination of resurgent inflation, supply chain headaches and a lack of qualified workers will tip the scales toward developing an exit strategy.

What can an owner do?
Lower valuations call for creativity in structuring transactions. Employee buyouts and ESOPs that maximize the benefits of sustainable cash flow can provide owners with income that wouldn’t be available from a hard-negotiated third-party sale.

Seller financing or installment sales may offer flexibility that brings more qualified buyers to the table. Stretching out proceeds as recurring income can help a seller wind up with more in his or her pocket, albeit over a longer time period.

Retaining your top talent will be more important than ever, especially if wages continue to rise. Structured equity sales can act as both an incentive and “golden handcuffs” to ensure that a company’s best employees, and consequently its enterprise value, remain intact through dips in revenue.

Prepared for 2023
Many owners were lulled into a false sense of security by frequent calls from business brokers and private equity groups. They may have postponed their planning in the belief that a transition could always happen whenever they felt the urge.

When the phone stops ringing, they will need cooler heads to help them understand that there are options besides a fire sale. Equity can be retained, and retirement can be secured. Work with an advisor who understands the alternatives to “List it and they will come.”

Companies will still be sold in the coming year. Prices may be lower, but are only falling from the unrealistic high driven by cheap money. It may feel like you are getting less than market value, but multiples have only receded to their historical mean.

If this is the year for you to begin your “second act,” it’s still the same approach as it was before. Being prepared for 2023 is a matter of researching the market, planning the process, and hiring qualified professionals.

John F. Dini develops transition and succession strategies that allow business owners to exit their companies on their own schedule, with the proceeds they seek and complete control over the process. He takes a coaching approach to client engagements, focusing on helping owners of companies with $1M to $250M in revenue achieve both their desired lifestyles and legacies.