By Dennis Zink
Posted May 9, 2019
As an Exit Strategist, I have come to realize there are several ways to Exit your business. When you finally come the realization that you want to get out of your business, the how and when include several options and variables to consider. Let’s call this the Exit Strategy Business of options for departure. Here are six strategies to consider for your exit:
You hate the business you are in and you want out yesterday.
Putting a good deal together takes a great deal of planning and time and may take one year or more. If you just want out, your business is losing money or your health has deteriorated, and you don’t care about potential equity you have built up, you can shutter the business immediately, lock the door, take the cash, collect receivables, pay payables, pay off leases, offer severance, sell assets, and put an end to your misery ASAP.
This might be the quickest way out, but it’s certainly not the most lucrative. In most cases it is the worst way to exit.
This strategy may take the longest time to implement, but it may provide the best return for the owner of a profitable business. You must gather current and historical financial information and statements. Profit & Loss, Balance Sheet, Statements of Cash Flow, Aged Receivables, Accounts Payable, and other schedules will need to be in order.
You and your accountant, or a business intermediary, will need to recast the financial information to help determine the true value of the business, including owner benefits. Be sure to list any personal items that will not be included in the sale. You’ll need to look at industry multiples and come up with a reasonable asking price. Hopefully, your broker will produce an interested party.
Assuming you strike a deal and agree on price and terms, you will go through a due diligence process confirming the information represented to the buyer.
Ideally, you will sell for the millions you think your business is worth and buy a condo on the beach!
The good news is that your partner should already be familiar with the business. The bad news may be that your partner is familiar with the business. Depending on why you want to get out, you may be able to work out a fair deal for you and your partner. If the cash flow of the business is thin, you may get a smaller amount down and finance a good portion of the balance.
Your comfort level will vary based on your relationship with your partner and how viable the business is and is likely to remain for the term of your payout.
(Include here a relevant segment of a SCORE Business TV video if you can)
Do you really want to sell to your competitor? A plus is that the buyer should be very familiar with your business and certainly your industry. A big minus is if the deal doesn’t go through, you just opened your kimono to your competition.
A big plus for the buyer, depending on the type of business, may be the realization of economies of scale making his existing business more profitable (1+1=3). In this instance, and if you are a good negotiator, you may get a very good deal. Be wary of the buyer who wants to purchase your company with your own (money) receivables.
If buyers are scarce, this tactic could provide good incentive adding to deal appeal.
This may make sense if there is a strong first or second person in charge, or if a management team is operating the business successfully.
An ESOP (Employee Stock Option Plan) may already be in place to financially execute this plan. This exit strategy can be fraught with many issues, including a lack of financial capability of your employees to consummate a deal. Generally speaking, ESOP’s are used with businesses that have revenue in excess of $10 million partly because ESOP fees are high.
Does your son or daughter really want to take over the business? Has your family member been working in the business? If more than one person is involved, do they get along with each other? Do you need to receive money from selling to a family member? Are you planning to stay on in a reduced role or consulting capacity?
Think twice about this strategy and make sure the family member really wants to be in this business.
There are other factors that you should consider regardless of the Exit Strategy Business method you choose, you will have to enter into a “covenant not to compete” for a period of time in a limited geographical area, unless you choose option No. 1.
You will need to carefully consider price and terms, vet the buyer and bet the farm that you will be paid for the sale of your baby. And, in the end, if you’re not retiring and are a true entrepreneur, you may want to do this all over again. exit stage left – and re-enter for an encore stage right!
Learn how to buy, sell, or improve your business. This eBook will be available March, 2020. In the meantime, you may contact me at [email protected]