If you’re in the throes of building a company, you are likely not even thinking about what comes next. But now is also the time to start planning the long-term strategy for your exit. To one day pull off a successful—and profitable—business exit, there are four important steps.
1. Start planning early
Do you remember this quote from Mad Men? “The day you sign a client is the day you start losing them.”
It’s not all that much different when you start a business. You know that your ownership or day-to-day management will come to an end someday; the question is whether or not you will be prepared for that day.
And there’s another truth that drives home the importance of this principle: You don’t get any mulligans with retirement. You will only get one chance at leaving your business, so you don’t want to be caught unaware when the time comes. Starting to plan five or even 10 years ahead of the date when you’d like to completely step away is about right.
Allowing yourself more planning time gives you some flexibility in choosing the right time to sell. For example, small business optimism is peaking right now, so it’s probably a good time to put a business on the market. Contrast this to December 2007, the start of what we now call “The Great Recession.” If you start planning very early, you can cash out when times are good and probably avoid having to sell during a recession.
Also, you should have some general idea of the route you’d like to take with your business from its inception. Are you building to sell? Or planning to pass it on to a family member? Or go public? However, in each one of these cases, there’s another factor to consider. I alluded to it earlier when I said that you don’t want to be caught unaware.
2. Cover your worst-case scenario
It’s simply a fact of life that illness, death, flood, or fire can strike unexpectedly. What happens to your exit strategy in those cases? I wonder right now how many business owners in Paradise California, which recently burned to the ground, were covered by adequate insurance. I suspect nature has imposed a harsh exit strategy on many of them.
But hazard insurance is only one type of insurance business owners need; they need one or more life insurance policies, as well. For example, if your business has outstanding debt, what would happen if you or a “key man” were to suddenly die? Would your family have the ability to run your operation and stay current with debt payments?
Wouldn’t it be far better to have a life insurance policy in place that would cover the debt, or at least provide enough money to give the surviving parties breathing room?
And, there is an important truism with life insurance. As Ty Stewart with SimpleLifeInsure.com advises, “Age is a big factor in premium pricing. A 45-year-old business owner will pay close to 50% more than a 40-year-old owner. It pays to get your life insurance policy set up at a younger age.”
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3. Identify new owners
There are three general directions to take when “passing the baton” on your business:
- Keep ownership in the family
- Sell to a current manager or employee group
- Sell to a third party
The implications for each of these are quite different. Let’s start at the top of the list.
More than one business owner has been shocked to discover that no one in their family is really interested in taking over the business. Also, an honest assessment might lead you to the conclusion that no one in the family is capable of running the business. Finally, there may be tensions between family members that would make successful future management difficult. All of these factors need to be considered.
Some of the same principles apply if you think a current manager would be interested in taking over the company. In this case, you would want to set aside adequate time to train the employee and fully judge their ability to be successful. An advantage of this scenario is the buyer understands the business and knows its value and its potential for growth.
Selling to a third party is a different beast. Think of the times you hit your local used car dealer to buy a vehicle. You kicked the tires, pointed out every flaw you could find, and did your best to negotiate a rock bottom price. Third-party buyers will be just as persnickety, and that brings us to our final exit plan principle.
4. Maximize value
Making your business as valuable as possible to potential new owners is always important, and especially so, if you’re going to put your business on the open market. Not only are sales important, but your mix of clients, your facilities, your employee turnover rate, your senior management, and more need to be considered.
For example, if the bulk of your sales is to one customer, that’s going to be a red flag for third-party buyers. What if the reason this customer buys from you is because you’ve enjoyed a long friendship with them? Or how about your top salespeople? Will they leave when you leave?
Maybe you’ve kept a facility open longer than you should have because you felt responsible for the employees, or maybe it was your first location. This is going to bring down your value.
This last of my key exit plan principles ties back to the first point I made. Many of these situations cannot be corrected overnight; they can take years of careful planning and execution to set right.
The good news is when you act in accordance to these principles, you can look forward to a wonderful retirement or new adventure.
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