Preparing to exit your business shouldn’t be taken lightly. But if you keep these 10 critical points in mind, you’ll improve your chances of having a high-valued exit.
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1. Understand the value of your business – and know how to articulate it
If you’re like most business owners, you probably think your company is pretty unique. And it is – but what makes it so? What unique selling points (USPs) make your business stand out in a competitive market?
To answer this question, you must understand what makes your business valuable.
Why would someone want to buy it? What are the key factors that set it apart from the competition?
Once you know this, you can start articulating it in a way that potential buyers will understand.
How do you do that?
Get a business valuation.
A business valuation is a process to determine the value of a company. It can be performed by an accounting firm or an M&A advisory firm like Stony Hill Advisors. Valuations are also constructed from publicly available information on websites such as Bloomberg and Reuters.
However, using such data can lead to inaccurate results as it takes a level of valuation expertise to get reliable results.
A business valuation will include information about the company’s operations and financial statements and information about the company’s industry.
The valuation will also include information on how the company compares to other companies in its industry and what factors may affect value over time.
Get your financial house in order.
Getting your financial house in order is vital if you’re considering selling your business.
That means putting together a complete and accurate picture of your company’s finances, including:
- All income and expenses for the past three years
- A current balance sheet
- A list of all assets and liabilities
- Details of any outstanding loans or lines of credit
This will not only make it easier to find a buyer, but it will also help you get the best possible price for your business. Buyers will generally require that your financial statements are audited.
Let’s go a little deeper into each of these financial documents:
Income and expense statements
Also known as a profit and loss (P&L) statement, this document shows your company’s revenue and expenses over time.
This is essential information for potential buyers because it will show them how much your company is making (or losing).
It’s also important to note that your P&L statement should be prepared in accordance with Generally Accepted Accounting Principles (GAAP).
This will ensure that the financial information is accurate and comparable to other companies in your industry.
Balance sheet
A balance sheet is a snapshot of your company’s financial health at a specific time.
It lists all of your company’s assets (what you own) and liabilities (what you owe).
This is important information for potential buyers because it will show them how much equity (i.e., ownership stake) they will have in the company if they purchase it.
It’s also important to note that your balance sheet should be prepared in accordance with GAAP.
This will ensure that the financial information is accurate and comparable to other companies in your industry.
Loans and lines of credit
If your company has outstanding loans or lines of credit, it’s important to include this information in your financial picture.
Potential buyers will want to know how much debt your company is carrying and the terms of the loans.
This information will help them gauge the financial risk of purchasing your business.
Now that you have a solid understanding of the financial documents you’ll need to prepare; let’s look at how CEOs can prepare themselves for a sale.
2. Prepare yourself emotionally
When you’re ready to sell your business, it’s important to take a step back and consider your emotions. After all, this is a huge decision that will impact your life in many ways.
A proper state of mind is critical to getting the best financial terms possible.
The first step in setting that state of mind is thinking about how selling your company can positively change your personal life.
For example, you may want to focus on new passions or spend more time with family and friends. It is also essential to reflect on how business issues may keep you up at night.
Think of ways to sell your business to help you achieve bigger goals.
Maybe there’s an opportunity for greater expansion or development of new products or services in a new company unencumbered by your current company’s baggage.
If you feel emotionally attached to your business, it becomes even more important to consider a sale’s personal impact.
On the other hand, it can be more manageable if you don’t have any emotional attachments to your company, such as if they were a hobby or passion project.
3. Know the magic number
When it comes time to sell your business, you’ll want to ensure you’re getting the best deal possible.
Determining your “go home” number is one of the first steps in this process. This is the amount of money it would take for you to walk away from your business and never have to work again.
There are a few factors that go into figuring out this number. Some of the most common ones are:
The size of your company
The size of your company will also play a role in your go-home number.
This is because businesses that are larger tend to sell for more money.
The amount of debt your business has
Finding a buyer willing to take on that liability may be challenging if your company has a lot of debt.
The current state of the economy
You also need to think about the current state of the economy and how that might impact your sale.
For example, buyers may be more cautious about spending money if there’s a recession.
You should also consider any potential changes in the near future that could impact your industry.
Your health
Your health is another crucial factor to consider when thinking about your go-home number, and thinking about your health can help you decide whether or not you’re able to continue working and how many years you have left to work.
It’s also important to consider the health of your business. If your company is in a declining industry, it may be more challenging to sell it for top dollar.
How much do you need to live comfortably?
Thinking about how much you need to live comfortably can help you ballpark your number.
This number will be different for everyone, but it’s essential to consider things like your mortgage, your kids’ education, and your lifestyle.
Your personal financial goals
Much like the amount of money you need to live comfortably, it’s important to consider your personal financial goals.
For some people, it may be that they want to retire at a certain age or they have a lifestyle they want to maintain. It’s helpful to have those types of goals in mind because it will help inform what that number is for you.
Taxes
Taxes are often a significant consideration, as they can affect how much money you receive from a sale. Be familiar with the ins and outs of tax law as it relates to business sales so that you can be prepared for any possible scenarios.
Structuring your corporate sale to minimize your tax burden can be complex, so working with a qualified tax advisor to ensure you’re taking advantage of all the available tax breaks is essential.
Knowing your “go home” number is vital in making the best decision for yourself and your business. Knowing your options will allow you to make a more informed decision about selling your company.
Finally, if your “go home” number is substantially larger than what the valuation analysis said your business is worth, you may have to create and execute a plan that can close the gap before putting your company on the market.
4. Build out your Management Team
When you’re getting ready to sell your business, it’s essential to have a complete management team in place. This will show potential buyers that you’re organized and have things under control. It also makes the transition smoother if and when a sale goes through.
It’s best to start at the top and fill lower-level positions as needed.
Define roles and responsibilities for each position, hire top-notch people, and have an exit strategy in place, if necessary.
Having a solid management team in place will help ease the transition should you sell your business.
5. Plan the Management Transition
When preparing to exit your business, one of the most important things to consider is the management transition.
You’ll need to ensure that critical employees stay with the company and that essential functions will be delegated to capable managers. In addition, it’s crucial to ensure that long-term relationships with clients and suppliers are maintained.
One way to do this is by granting equity to key employees that vests over time–this will encourage them to stay with the company for a more extended period.
Additionally, agreements should be made with employees for a defined period. This way, if they leave the company before the end of that period, they won’t receive the benefits designed for retention.
It’s also essential to have a clear career path for each employee–not just their current job title or position in the company. Managers should be able to fill your shoes in case of a sale, so invest resources into training or replacing them accordingly.
And lastly, don’t forget about those all-important third-party relationships! Make sure contracts are in place that guarantee their continued support of your business during and after the management transition process.
6. Communicate with your employees
When exiting a business, it is crucial to communicate with your employees. This allows them to understand the situation and why particular decisions were made. It also shows that you value them as individuals and want to ensure they are taken care of.
7. Set up and document business operations and systems.
As a small business, you should set up and document your business processes and systems. This will help you run your business more efficiently and effectively.
There are many software programs available that can help you document your business processes and systems. Once you have everything written, train your employees to use the new system.
8. Time your exit
You’ll need to consider the current economic conditions, the industry you’re in, and the overall health of your business. In addition, you’ll want to factor in any personal considerations, such as your age and retirement goals. Giving your employees and customers advance notice of your plans to exit the business is also essential.
This will give them time to adjust and make any necessary arrangements.
9. Get help from a lawyer and accountant
Getting help from a lawyer and accountant is important when you’re preparing to exit your business. They can assist you with any tax implications of selling your business and any legal issues that may arise.
10. Hire a business coach
Lastly, consider hiring a business coach (learn some of the top-secret benefits of hiring one). A business coach can help you plan and execute your exit strategy and provide support and guidance along the way.
But finding the right coach isn’t always easy. You need someone who understands your industry and can offer realistic, actionable advice on exiting your business.
As a business coach, one of the things I specialize in is helping people plan and execute their exit strategies.
Whether you’re looking to sell your business or hand it down to the next generation, I can provide you with the support and guidance you need to make the process as smooth and successful as possible.
One of the benefits of working with me is that I can help you identify any potential roadblocks or challenges you may face. I can also offer realistic, actionable advice on how to overcome them.
If you’re considering hiring a business coach, I encourage you to reach out and schedule a consultation. I’ll be happy to answer any questions you have and give you an overview of what I can do to help you exit your business successfully.
Book a free consultation today, and learn how I can help you determine the best type of exit strategy for you.
I hope this article has given you some food for thought as you begin to plan your business exit strategy, remembering that the most important thing is that you start planning early.
Book a free consultation today, and learn how working with an executive coach can help you increase your bottom line.
John Grillos
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