EXIT PLANNING FOR SMALL BUSINESS

Exit planning for a small business should begin five to seven years before the event is expected to happen.  When the business owner postpones the process to less time, numerous compromises must be made and increases the possibility that the owner will not achieve his/her full objectives.

This article barely touches the details involved in a quality exit strategy and one need to hire a person whose expertise is in this field.  Hopefully, you will be challenged to gain more information and begin the process to achieve your objectives.

It is vital that the business owner give considerable thought and attention to his/her objectives for exiting the business.  These thoughts and considerations should include but are not limited to:  1. What do you want to achieve from the sale of your business?  2. To whom does he/she want to transfer the business?  3. When does the owner want to transfer the business?  4. What role does the owner want to have in the new business?  5.   Are there other factors that must be taken into consideration like partners?  All of these are viable options given the right set of circumstances and the quality of the business.  For an objective and realistic value of the business, one does need get a qualified business appraiser to establish the true value of the business early in the process.  Each option can have a different value.

Once the owner has defined the objectives, has a fair valuation of the business, he/she needs to consider hiring an unbiased third party to facilitate the process and bring all of the parties together who are stakeholders in the process or the outcome.  This would include the owner, the owner’s family, partners, key employees, banker, lawyer, CPA, insurance broker and any other party who may need to play a role in the final process.  It is important to remember that the value of a business is in its customers and employees.  Without either of these, a business cannot survive.

Now that all of the stakeholders understand the owner’s objectives, it is time for the neutral third party to begin the assessment of the business and the instruments that are in place to create the greatest value and protection for the current owner and the buyer.  This can take some time depending on the financial health of the business, the quality of the customers and employees, and market.  Often times the third party adviser will recommend that the financials be restated, that certain contracts with key employees are executed, certain financial decisions are made based upon tax consequences, even contracts between partners, family members and or investors need to be executed, etc. 

All of these steps will increase the value of the business if they are done correctly and in a timely manner.  Many times a business needs to work on their balance sheet and/or their income statement in order to present a healthier business.  More times than not attention needs to be focused on cash flow.  Remember, cash is king.  More or less emphasis may also need to be placed on marketing, sales, organization, etc.  The owner may need to hire one or more key employees to replace the role the owner is playing in the business.  While these are not difficult or complicated steps, they do take time and each will increase the value of the business.

We have all heard antidotes of businesses that have sold in days and there are more stories of where businesses never sold as a complete entity.  The statistics tell us that less than 25% of businesses grossing $5 million or less never sell.  Remember, as a business owner, you have a choice which statistic you prefer and if you begin the exit planning early, you increase your chances for achieving your objectives. 

Exit planning for a small business should begin five to seven years before the event is expected to happen.  When the business owner postpones the process to less time, numerous compromises must be made and increases the possibility that the owner will not achieve his/her full objectives.

This article barely touches the details involved in a quality exit strategy and one need to hire a person whose expertise is in this field.  Hopefully, you will be challenged to gain more information and begin the process to achieve your objectives.

It is vital that the business owner give considerable thought and attention to his/her objectives for exiting the business.  These thoughts and considerations should include but are not limited to:  1. What do you want to achieve from the sale of your business?  2. To whom does he/she want to transfer the business?  3. When does the owner want to transfer the business?  4. What role does the owner want to have in the new business?  5.   Are there other factors that must be taken into consideration like partners?  All of these are viable options given the right set of circumstances and the quality of the business.  For an objective and realistic value of the business, one does need get a qualified business appraiser to establish the true value of the business early in the process.  Each option can have a different value.

Once the owner has defined the objectives, has a fair valuation of the business, he/she needs to consider hiring an unbiased third party to facilitate the process and bring all of the parties together who are stakeholders in the process or the outcome.  This would include the owner, the owner’s family, partners, key employees, banker, lawyer, CPA, insurance broker and any other party who may need to play a role in the final process.  It is important to remember that the value of a business is in its customers and employees.  Without either of these, a business cannot survive.

Now that all of the stakeholders understand the owner’s objectives, it is time for the neutral third party to begin the assessment of the business and the instruments that are in place to create the greatest value and protection for the current owner and the buyer.  This can take some time depending on the financial health of the business, the quality of the customers and employees, and market.  Often times the third party adviser will recommend that the financials be restated, that certain contracts with key employees are executed, certain financial decisions are made based upon tax consequences, even contracts between partners, family members and or investors need to be executed, etc. 

All of these steps will increase the value of the business if they are done correctly and in a timely manner.  Many times a business needs to work on their balance sheet and/or their income statement in order to present a healthier business.  More times than not attention needs to be focused on cash flow.  Remember, cash is king.  More or less emphasis may also need to be placed on marketing, sales, organization, etc.  The owner may need to hire one or more key employees to replace the role the owner is playing in the business.  While these are not difficult or complicated steps, they do take time and each will increase the value of the business.

We have all heard antidotes of businesses that have sold in days and there are more stories of where businesses never sold as a complete entity.  The statistics tell us that less than 25% of businesses grossing $5 million or less never sell.  Remember, as a business owner, you have a choice which statistic you prefer and if you begin the exit planning early, you increase your chances for achieving your objectives.