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An Exit Strategy for Small Business Owners

By Alan Salmon – Rotary eClub One Member

Many Rotarians are small business owners. Here is some information that offers some practical advice.

There is a time in the life cycle of every business where the owner decides it’s time to sell and invest the proceeds from the sale. When that time arrives you need to manage the process as smartly as you managed the business. A key step, before you start negotiating with a buyer, is to prepare a strategic exit plan. This will ensure that any sale will meet your long term financial needs and goals.

To prepare the plan you need to understand the underlying value of your business and establish your exit strategy goals. This is a key component of the planning process.

There are many reasons why you might consider selling your business. These can include an interest in retirement, a change in business conditions, a desire to start a new company or an unsolicited enticing offer. If you don’t know the value of your business it’s almost impossible to evaluate an offer and make an informed decision. Understanding the value of the business is crucial to implementing a strategic plan for the eventual sale of a business. It will protect you and your family from having a “fire sale,” where you are forced to sell your business below market value in response to illness or death. Any exit plan should be discussed with your trusted advisors such as your accountant and lawyer.

The most successful business owners have the ability to see the big picture. They manage their business by the numbers; know where their industry and the economy is going and what the growth opportunities are in their market sector. They have established their personal goals, know if it’s time to sell their business and for how much.”

Another advantage of having an exit strategy plan is that it will help you to secure the greatest value for your company so you don’t leave money on the table when you decide to sell. This type of planning includes preparing for the eventual succession or sale of your business, support for transition plans and reinvestment strategies.

There are a number of ways to value a business. Technically, a business can be valued by its assets, cash flow or industry. But the most important consideration for a purchase and what makes a business valuable to a buyer is the projected future earnings. Many small businesses are successful because of the driving force from the owner. To obtain real value when you sell a company it is important to “position your business to succeed without you.”

Here are some ways to make your business more attractive to buyers:

• Replace yourself by training a family member, employee or manager to operate the business.

• Change from doing everything to becoming a mentor or advisor to prepare for your eventual exit.

• Develop a written operational and procedures manual that provides a detailed guide on how your business really works.

• Identify resources and develop plans for future growth.

• Consider forming an advisory board to develop your business plan.

An advisory board can be a great asset to a family owned business and seeking advice from industry experts can also help strengthen your strategic business plans. Your advisory board can provide new expertise, ideas for business options and feedback on goals and plans. The key to a successful advisory board is to find individuals who respect your business process and are willing to work with other professionals to help you define and fulfill your business vision.

The makeup of your board is extremely important and should include a variety of experts with specialties different than the business owner. For example, a team might include an accountant, tax advisor, lawyer, banker, insurance agent, marketing professional and a related industry expert. A well-organized advisory board can provide valuable insights and is worth the return on the small fees that you will be required to pay.

You will have to decide if it’s worth hiring experts to take the business to the next level to increase returns and/or to find a buyer. Selling the business is not the only option. An advisory board can help inspire a reinvestment in the business by taking it in a new direction or expanding it, redefining the owner’s role and creating a strategic plan to support the owner’s long-term transition goals.

If you have a family business, your family members are the stakeholders who are impacted by your long-term business plans. It is a good practice to hold regular meetings with your stakeholders. It keeps them informed, lets them develop realistic expectations for the future and can teach them business skills. These meetings will also help build support for your exit strategies and eliminates surprises.

One of the possible pitfalls in an exit strategy is not knowing how much money your need. If you don’t know that number then don’t put the business up for sale. One way to determine a sale price is to consider the worth of the business in relation to industry trends, future earnings, the current economy and its value to you. When establishing the value of the business to you, remember to make the following adjustments to the sale price:

• Add receivables and subtract payables.

• Subtract capital gains tax, which can be as high as 25 per cent if the company is not structured to qualify for any exemptions.

• Subtract discretionary expenses typically covered by the business — automobiles, conferences, education, healthcare benefits, travel, etc.

Finally remember that the actual gain you receive from your exit strategy is what it’s really all about. You take that value and then determine what your return will be when you reinvest it. For example, let’s assume your business currently provides a return of 20 per cent each year. How will that compare to the average return on the new investments you make after the sale? Can you afford to maintain your lifestyle on those returns? What are you going to do if you need more money than the immediate sale of the business can provide to support your new goals?

Family-run businesses tend to bring in higher returns than publicly held companies because the small-business owner is invested in the business, connected on a ground level to industry changes and tends to be an involved manager who has good relationships with customers, employees and suppliers.

If your entire net worth is tied up in the family business, it may be difficult to surrender control to other family members or get all of your wealth out from a sale. The more diversified your investments are, the more options you have.

One step in your exit strategy may be to start pulling unneeded funds from the company and reinvest it. That way you won’t have all of your eggs in one basket. This again comes back to the key principle of creating a planned exit strategy.

If you follow the above steps you will have a much better chance of selling your business and living comfortably on the proceeds.

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