Fundamentals of Exit Planning
One of the drums we beat a lot in these articles, and have even more so this year, is the importance of exit planning. The vast majority of business owners never do it until they’re in the middle of a transaction. But if you take the time to do so, not only are you going to probably get a better deal than you otherwise would have, you’re going to get to keep more money too. Let’s look at some fundamentals of the exit planning process.
When to Plan
As they say, the best time to plant a tree is twenty years ago; the next best time is now. You don’t need to go back twenty years to plan a business exit, but 2-5 years will give you a chance to do the tax planning, business enhancement, and transition planning you’ll need in a sale. On top of that, you’ll then be in the position of watching the market and making a move when it’s favorable for you, not just because now you’ve decided to sell. Market timing is a factor often entirely disregarded by sellers.
What to Plan
A business sale is often the most significant financial transaction of an individual’s life. What is it that you want to accomplish by a business sale? That question can be overwhelming, so think about it in via these smaller questions:
- What do you want your business to accomplish before the exit? Is there a revenue goal or particular milestone that matters to you? Or do you feel that the only way to get to the next level is through significant investment and hiring?
- When do you want to exit? In the next year, the next five years, the next ten years?
- How do you want to exit? Are you okay to stay on for a transition period or do you want to be done right away? Do you want cash upfront or are you okay with an earnout?
- What do you want to accomplish as a result of your exit? Do you never want to work again? Do you want a break from working? Do you want to use the funds to buy a different business?
Once you’ve answered these smaller questions we will have a much better idea of your answer to the first question, which was what did you want to accomplish by a business sale. Now the process begins of bringing your answers into alignment with each other. For example, if you want to sell in the next year, and you want to walk away with no transition and an all cash-deal, is the business ready for you to leave and is the business attractive enough and in the right range to attract an all-cash deal? The answers to those questions can then drive the changes you want or force you to question whether your expectations are reasonable. And yes, there are plenty of times when seller’s expectations are out-of-this-galaxy unrealistic.
What to Know
Many sellers are in a first-time position, so rather than lamenting all they don’t know they should take the time to educate themselves. Do they know:
- How long a business takes to sell
- What due diligence can uncover
- What are Letters of Intent and Offers to Purchase
- The difference between a strategic buyer and a financial buyer
- The possibility of selling to employees via an ESOP
- The possibility of using a deferred sales trust
- Why valuations matter
These are just a few of the many areas that we as brokers will cover with buyers and sellers, but like anything in life, the more you bring to the table, the more you’ll get out of an experience. The more familiar you are with these matters during your exit planning, the clearer headed you’ll be when it comes time to actually move towards a transaction.
Do you really want one of the most important, if not the most important financial transaction of your life to be something you compress into a few emotional weeks and months, or would you rather have the benefit of taking the time to do the exit planning now so that when those weeks and months before closing do come, they are less emotional, and as a result, probably more financially profitable? Then take the time to do the work now.
We would love to help you think through your exit planning. Give us a call.
