Exiting your business is likely the largest financial transaction you will ever make. Most owners have 70% or more of their net worth tied up in the company. This is why a transition demands about five years of planning for tax issues, value enhancements, market timing, and other factors. A well-planned exit involves the following steps:
Aligning the Owner’s Long-Term Business, Personal, and Financial Goals
Success is measured differently by every owner. That’s why every exit plan needs to begin with a clear list of goals and a definition of success. Some questions owners should ask themselves include:
- What do you want the business to achieve before and after you leave?
- When do you want to exit?
- What do you want to do when you exit?
- How much money do you need from the business to fund your personal financial goals?
You must then reconcile discrepancies between these goals. For instance, if you want to exit soon but need more money from the business than it can currently offer, this is a problem to address. If your financial goals have little flexibility, as is often the case, you’ll likely have to make adjustments to other goals.
Empowerment with a Detailed Knowledge of All Exit Options
You may have more options for succession than you realize. In conjunction with a reconciliation of your long-term goals, it’s important to explore all possible exit options. The breadth of these options will widen or narrow depending on your ultimate goals. Some options include, but are by no means limited to:
- Selling to a third party, such as a strategic or financial buyer
- Selling to employees
- Transferring the business to family
- Selling via an ESOP
- Closing the business or liquidating its assets
Maximizing Business Value
Buyers use many factors to determine value, and no two buyers will assign the same value to a business. As you prepare for a transition, consider things from the buyer’s perspective. Owners often do this too late. A sound exit plan needs to look at ways to maximize value. This can be hard if the owner has never bought or sold a company before. So an outside perspective can be an invaluable resource for assessing company value and increasing it.
Owners will want to look especially at strategic value drivers that reduce risk and improve investment return. These include the customer base, market presence, geographic reach, market share, intellectual property, distribution network, brands or reputation, skilled workforce or management team, reputation, and numerous other factors.
Minimizing Tax Liability
The actual cash an owner receives is always less than the selling price. Tax consequences can greatly lower net cash to the owner. Some owners are shocked by the tax price tag. Without significant planning, owners can leave significant wealth in the pocket of taxation authorities. A good exit plan addresses numerous tax saving opportunities, including corporate, personal, estate, and transaction taxes.
Maximize What the Market Will Pay
When owners elect an external transfer channel, as most due, three key components will maximize what the market is willing to pay:
- Sell side due diligence, which is the process of preparing a business for the buyer’s due diligence process. This can expedite the due diligence process, and may even promote a higher value.
- Market timing, which is truly everything. To maximize value, all critical components must be correctly aligned. The ideal sales window may be small, so owners should plan accordingly.
- Competing buyers, since one buyer can quickly become no buyer. An exit plan should involve the creation of an ideal buyer profile. This allows you to court buyers who fit that profile, which can lead to a lucrative bidding war.
The right plan can yield a marketing plan that creates a competitive environment in which to sell the business. Spend time to get it right, and ensure you get the top value for your company.
