Do You Have an Adequate Exit Strategy for your Business? - Management
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Do You Have an Adequate Exit Strategy for your Business?

By Paula Charles

Article Date: 01-01-2005
Copyright(C) 2008 Associated Equipment Distributors. All Rights Reserved.

Some exit strategies result in higher proceeds to the seller.

Most entrepreneurs know at some point they'll exit their businesses - they just may not know how or when. And unfortunately, they usually don't think about it very much until they're ready to exit. But, if you don't understand what makes your business attractive to a buyer and address those motivations, you won't realize full value when your business sells.

If you're like most owners, proceeds from the sale of your business will fund a large portion of your retirement or your next venture, so exit planning is a prudent and necessary step toward achieving those objectives.

There are four primary considerations when developing an exit strategy:

  • Your immediate and long-term plans - How much longer do you want to be with the business? Do you know what needs to be done now to realize full value later? How hard are you willing to work to achieve full value? What will you do when you leave? 
  • The ongoing business - Do you care what a buyer does with the business? How important to you is the long-term effect of the sale on your employees? Do you want the new owner to maintain the reputation and traditions you established?
  • The financial gap - Do you know what your business is worth in cash? How does that compare to what you want from the business upon exiting? Do you have a plan on how to address the gap?
  • The deal implications - Do you understand the tax ramifications of when and how you sell? Do you know how you'll invest the proceeds from the sale? How long are you willing to stay on to "train" the new owner? And under what conditions would you consider seller-financing?
Identifying the most likely exit scenario is an important part of planning your departure from the business. Just as you should never assume your business is sellable to a third party, neither should you assume that no third party would ever want to purchase it. Many businesses are shut down that could have been sold.

You can take actions now that can help make seemingly unsellable businesses sellable. And even if your business is doing well, you can attract a broader range of buyers with proper planning.

There are many exit strategies, including: selling to a strategic buyer, selling to a financial buyer, selling to heirs or employees, liquidating assets over time, managing for life, hiring a manager, closing the business, merging with another company or going public.

Each has significant implications in terms of staff development and retention, financial reporting and accounting practices, branding and marketing, compensation, income tax considerations, and capital investment requirements.

Additionally, some exit strategies result in higher proceeds to the seller. You can make your business more attractive to potential buyers through strong financial performance and sales trends, financial records that are GAAP-compliant with well organized backup, clean contracts and legal compliance, branding the company and not the owner, and running the business with the same professionalism as a Fortune 500 company and the same enthusiasm as a new owner.

However, these efforts must be made in advance - buyers buy for the future, but they pay for the past. Also, different types of buyers have different criteria. For example, if the business is attractive to a public company, you will need three years of audited financial statements. It's not prudent to wait until you have a public company suitor to get the books audited.

All businesses can be made attractive to buyers with the combination of proper exit planning and execution. The last few years of your ownership should be approached with the same intensity as the first years. Even if this means bringing in external help, it's worth the investment to achieve maximum value.

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Article Categories:  Financial  »  Management