100 percent of people eventually leave their business. A good exit strategy allows owners to turn a good thing into a better one by protecting assets, building value, and striking the best deal
Entrepreneurs want their business to grow and thrive, and an increasing number also want to sell. Last year saw a record number of businesses sold as a booming market for owners and buyers took shape. Almost 12 million businesses will transition ownership in the next 15 years, representing $10 trillion worth of assets changing hands.
Nevertheless, further data shows that too many owners are far from prepared for their exit:
- 48 percent of businesses don’t have an exit strategy
- 58 percent have never undergone a formal business appraisal
- 75 percent of business owners believe they can sell-up successfully in under a year
These figures don’t go well with the 82 percent of owners who’d rather make money from selling a business than keeping it. Those who want to capitalize successfully cannot do so without a well-structured exit strategy. Even if you don’t plan to sell or transition out in the near future, you’ll eventually need a plan, no matter the size of your operation. And it pays to start planning ahead of time.
Succession and continuity planning
Many exit strategies don’t involve a buyer from the open market. Instead, owners often choose a successor from within. This guide provides the steps for a solid succession plan; a strategy which involves mentoring your successor and setting a clear timetable of their responsibilities and all future transition dates. There are a couple of key considerations when choosing to go this route:
- Ensuring that you have the right relationships in place is essential. You may have the most power in a business you own, but your exit can be vastly smoothed or shaken by those around you. Many once-harmonious business partners will attest to the fact that acrimonious splits can be a nightmare. Any issues can be avoided (or at least mitigated) by drafting your exit strategy proactively, while key parties are on good terms. It will clarify buy/sell agreements and the best exit strategies will let every employee know that a change of ownership is coming and what it means for them.
- Be sure to factor successful estate planning and retirement into your exit strategy. Your business may have multiple owners and if so, a cross-purchase agreement will smooth succession, assist in retirement, and guard against unforeseen events.
The Value Builder System: a key to ROI
If you plan to sell your company to an insider or an outside buyer, you want to make it as valuable as possible. The Value Builder System (VBS) is the brainchild of John Warrilow, author of the highly rated Built to Sell: Creating a Business that can Thrive Without You. The VBS makes things simple if you’re looking to attract buyers: to increase the value of your business, you must increase either your profit or your multiple.
Your multiple is driven by 8 factors:
- Financial performance: Recording your top line revenue and your bottom-line profit is a priority for any exit strategy. Consider investing in an audit so you’re better able to present your business numbers reliably.
- Growth potential: Your past successes are great, but buyers are purchasing tomorrow, not yesterday. They want to invest in your future profit stream. Can you show them anyways your business can significantly scale up?
- The Switzerland Structure: Just like the famously neutral country in question, your business should not be overly dependent on any one faction—not customers, not employees, not suppliers. You’ll be considered more of a risk if buyers see you’re too reliant on a single source.
- Valuation Teeter-Totter: Anyone buying your business essentially writes two checks—one to you, and the other to fund your business’s working capital. The more money it costs to run, the less likely it is to sell. Your operation must be generating enough cash to balance things out.
- Recurring revenue: There are six types of recurring revenue: consumables (like coffee), sunk money consumables (espresso machines will need capsules regularly), subscription revenue (like magazines, this is a reoccurring revenue for a specified time into the future), sunk money subscriptions, auto-renewal (a subscription in perpetuity), and contract revenue (where a customer is obligated to buy from you in the future).
- Monopoly control: This means you have control over the pricing of your product; you’re not a commodity. Your business should be in a differentiated position which makes you unique in the marketplace. This empowers you (and whomever inherits your business) to stand out and connect more effectively with customers.
- Customer satisfaction: This is directly linked to the growth potential for prospective buyers. Can you empirically quantify and demonstrate customer satisfaction to a buyer? The more data you can show that proves your customers are happy and likely to keep buying, the more impressive you’ll be to anyone looking to acquire the business.
- Hub and Spoke: How much freedom do you enjoy as the current owner of your business? It’s not an attractive sell if your entire life is consumed by its operation. A company that can flourish even in the absence of the boss is much more likely to close a deal. Document, distribute, and drive home your business practices so all your employees intrinsically know their roles and responsibilities. They’ll be more likely to run a smooth ship whether you’re on deck or not.
A smart, comprehensive exit strategy should be put in place early to make sure you maximize the ROI from the sale of your business. If you’d like expert advice on how to exit plan ahead and sell a business tax efficiently, contact us below.
Provident CPA & Business Advisors helps successful professionals, entrepreneurs, and investors get more out of their business and work less. Typically, our clients reduce their taxes by 20 percent or more and create tax-free wealth for life. Contact us for expert advice on tax planning and discover how we help businesses exceed expectations.