You’ve worked years in developing a business into something that has tangible value. So now what? How and when does the entrepreneur get the money and sweat equity invested back out of their business?
Operating without an exit strategy can have far reaching effects as owners evaluate retirement, quality of life balance, future risk or timing of industry business cycles. Owners also face partner disputes, divorce, or health issues that can cripple a business, especially in the absence of a defined strategy.
These are 5 key factors that affect business exit strategy:
1. Timing - How long do you plan to work in or on your business? What are the top business metrics you are looking to achieve to define “success”? Wise exit planning starts at least 3 years prior to the sale decision with the sale process often lasting up to 1 year from going onto the market.
2. Type - Are you large enough for a public offering? Are you attractive enough for a corporate acquisition from a key competitor or financial investor? Are you motivated in continuing your legacy by passing the company to family or key employees? Does it make best sense to keep a “lifestyle company” where you maximize distributions and take money out as you go? Identifying the buyer profile based upon your core motivations can greatly streamline the process.
3. Valuation – You can engage five independent valuation firms and you’ll get five different answers. While the valuation is important and serves to set a baseline, it is only a singular component of a complex process.
Take stock of your assets: cash, receivables, inventory, property, facilities, patents, trademarks, backlog, intellectual property and brand/reputation (good will). Do your own independent research to see what other companies within your industry have sold for and what the valuation methodology was used. An external CPA that has your industry expertise will typically have benchmark data for most common valuation methodologies and multiples your size organization may sell for.
4. Marketing – There are many ways in which you might go about identifying a prospective buyer. From business brokers to investment bankers, there are many professionals that make their living by brokering businesses. While there are many reputable firms, no one knows your business, competitive landscape, customers and your value propositions better than you.
Take inventory of your competition and who may wish to make a strategic acquisition of your business in order to expand their market share or augment their offerings. A strategic buyer is more likely to pay a higher multiple for your business and will understand the nuances of the industry more readily than someone making an acquisition purely as an investment.
5. Due Diligence - Negotiation – This is where most money is made or lost. Typically, there is an inordinate amount of time and energy spent on negotiating the final price and payout terms. The buyer will want a due diligence period to assess that what you’ve represented is accurate. This process will undoubtedly unearth some issues that are certain to degrade the valuation.
We tell sellers that, “we’ll do any acquisition at whatever valuation the seller deems fair if we can control one thing: the terms of the payout.” How much cash will you get up front? What milestones must be met to achieve the balance of your payout? What specific liabilities will the buyer be responsible for? How long does the buyer expect you to stay on after closing?
Owners interested in selling their business are confronted with many, often overwhelming, questions.
Creating an exit plan coupled with the right team of financial and operational resources can minimize risk, streamline the process, accelerate the timeline and ensure you receive the best valuation for the business you’ve created.