Author: Larry Chester, President

Do THIS to Successfully Plan for Exit

Not every business owner plans for their exit, but every successful business exit strategy requires some degree of forethought. Of course, sudden changes in health aren’t something you can plan on. Often, however, business owners make the decision to leave their businesses quickly for other reasons.

Some hypothetical examples include the following:

• The CEO’s best friend died of a heart attack over the weekend. The CEO then arrived at the office the following Monday, announcing to everyone that he was retiring and that he’d select his replacement by the end of the week.
• A business owner moved to Florida to start planning the next phase of his life. With the general election going to the Democrats, he made the decision that he needed to sell his company in the coming months to avoid upcoming changes in the capital gains tax.
• A couple who owned a pair of companies had been thinking about selling their businesses in a few years. With the business changes forced by the pandemic, they decided to sell their business now, rather than wait.

All of these scenarios have one thing in common—these owners have all suddenly decided to sell their businesses and leave.

In our opinion at CFO Simplified, this is actually no different than waiting until you’re on your death bed and deciding that it’s time to put together an estate plan to pass your personal assets to the next generation.

Did you know, based on recent surveys of the business owner market, 66% of business owners are not familiar with all their exit options while 83% of business owners have no written transition plan at all?

Procrastination is unwarranted because preparing a company for a sale isn’t difficult.  It does, however, require a different approach. A little preparation will ultimately put more money in your pocket. Here are eight steps you can take to prepare for your exit.

Methods for a Successful Business Exit Strategy

Explain the Reason

The reason why you’re selling can have a positive impact on buyers. Make sure that it is related to your personal needs rather than the upcoming difficulties in your business.

Understand Your Company’s Value

Depending on how large or complex your company is, a formal valuation of your company might cost between $10,000 and $25,000 or more. But you can also get a general idea of the company’s worth by talking to a mergers and acquisition advisory firm. This way, you’ll get an idea of what to expect when you sell.

Reduce the Company’s Dependence on You

If you’re critical to your company’s operation, its value will be diminished when you leave. Taking the time to train others to take over key responsibilities will increase the value of your business.

Increase your Profitability

Take steps to improve the bottom line.

Did you know that 35% of business owners are expected to “exit” over the next three to five years? Yet, 63% have no formal or proactive exit strategy.

The first step to take is to increase your profitability.

A fractional CFO can give you suggestions on how to do so. Remember, this needs to be done three to five years ahead of any sale, so that you can show that changes you made have a lasting impact on the bottom line, as opposed to taking a hatchet to operations.

Sudden changes in profitability just before the sale have less of an impact on valuation than changes that have consistently impacted profits for a period of years. 

While this might increase your taxes for a few years, it will reap large benefits down the road, because businesses sell for a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization).

Every new dollar of profit might add $2 or even $8 to the selling price.

Examine Your Compensation

The amount of money that you take out of your business comes out in several different ways, but each reduces profitability. These include:

Direct Compensation

Every dollar you take in salary and bonus reduces profitability. You’ll get it back when you sell, but in the meantime, the buyers are going to look at your EBITDA.  They can certainly add back your payroll, but the fewer adjustments they make, the better.

Perks and Excessive Benefits

This may look like:

• Driving a luxury car
• Taking personal vacations at company expense
• Buying expensive meals and entertainment
• Officer life insurance

Benefits of being the owner, like those listed above, drive down profitability. Forgoing those perks now will improve the bottom line, increasing the expected selling price.

Document Processes

You will get more from your business if you make sure that the operations are clean and processes well documented.

Every business owner knows the details of how their business runs. So, if you can easily transfer that knowledge to the buyer, confidence in their ability to replicate your success will increase your price and ease of selling.

Identify Your Assets

Companies have both hard (tangible) assets and soft (intangible) assets.

Your equipment, fixtures, inventory are all examples of tangible assets. But your brand name, reputation in the marketplace, and customer relationships are all intangible assets that add value to the company. Be sure that your brand name and other intangibles are documented and trademarked as those are valuable assets to the purchaser.

Understand Tax Implications

The tax code is detailed and complex. How your business’ sale is structured will have an impact on the amount of taxes that you’re going to pay.

Visiting with a tax attorney can save you money. And, if your business has a high value, and you’re going to be subject to inheritance taxes, there are ways of mitigating those taxes so that your family doesn’t end up having to sell the business just to be able to pay the taxes on their inheritance.

What Does Every Successful Business Exit Strategy Have in Common?

Foresight.

One way or the other, whether you give it to a family member, sell it to the highest bidder, or have your family deal with it after you’re gone, you’re going to leave your business. Planning your business exit strategy will not only make that transition easier but also will result in greater wealth for you or your family.

Just as you can’t assemble your will and estate plan after you’re gone, you can’t make these changes to your business in a few weeks or months after you’ve decided to sell. Again, a little preparation goes a long way to put more money in your pocket.  

Many of these things will help you run your business more profitably now; others will only have an impact somewhere down the road. But you can either have an impact on the sale of your business, or you can let it happen without your involvement.  That’s not the way you built your business, so why would you let it be the way you leave it?

Read on for more on how to prepare to exit your business.