Business Exit Strategies 101

Sergei Galeano, CPA
Sergei Galeano

A quick guide for the potential sale or succession of your business.

Every day business owners are making the decision to exit their businesses.  This is usually the event that has the greatest financial impact in their lifetime (although most of us swear it is having children).   Unfortunately, many owners don’t plan for this event and leave themselves in a position to receive much less for their greatest asset than they may have with some planning.  Many owners only get one bite at this apple, so make the most of it.  Here are some of the things that each owner should consider:

  1. Plan – Probably the most important step. Don’t decide one day it is time to sell now and not prepare to get the maximum value out of your business.  This can mean two to four years of planning and preparation, but even just months of preparation can have a great impact.  Identify what the goals and objectives are for exiting.  Do you want out altogether, remain involved in some capacity, transfer to family or outright sale to a third party?   Do you know what you need to get out of your business to support your after-business life?
  2. Owner Needs to Decide About Involvement They Want to Have After a Sale – An owner will generally follow one of two options regarding their future participation after a sale:
      • They want to continue on as part of the organization, and in some cases the buyer will insist on this, or they want to sell and get out immediately.
      • If they want to continue on, they will need to ensure that they are still a relevant part of the business and bring real value to ongoing operations.
      • If they want to sell and get out, they will have to pay closer attention to some of the issues noted below. This not only involves processes, but ensuring that the right people are in place to move the company forward without the owner.  If the owner gets all the sales, has all the vendor contacts and makes all the decisions, then their business has little or no value without them. 
  3. Get Your Financial Reporting in Order – Accurate, detailed and consistent financial information is essential. Potential buyers want to be able to understand how your business has performed, where the revenue is coming from, what are the biggest expenses, and much, much more.  Most importantly, they want to minimize their risk by having confidence in those statements to avoid surprises.
      • Consistent reporting – Don’t record revenue/expenses one way one year and another the next.
      • Reporting in accordance with Generally Accepted Accounting Principles (GAAP) would be best, although cash reporting can suffice with proper additional explanation and disclosure, particularly of unreported liabilities. Also, there may be some industries that generally report with some variation of GAAP.
      • “It’s Business” – Do as much as possible to not mix personal expenses with your business activity. This will simply the financial reporting and company valuation.
      • Consider Getting Financial Statements Reviewed or Audited – The same company becomes more valuable with audited (best) or reviewed (sufficient) statements from a respected CPA firm, as it reduces risk from the buyer’s perspective
  4. Identify Key Employees – Who do you need to keep around to make your business more valuable down the road? Sales manager, CFO, top salesmen, operations manager?  Make sure to identify these people and have compensation plans in place to keep them around.
  5. Drive Short to Mid-Term Growth – As noted below, many sale prices are based on multiples of recent and current financial performance. This could be EBITDA, cash flow or Sales/Premiums, etc.  Consider those strategic decisions that will drive the value of your company up in the timeframe that you envision a sale, without material negative impact to the future.  These may not be the same decisions you would make if looking toward a longer term.
  6. Consider the Timing of the Sale – You would prefer to sell when you have had a good two or more years of operating results and expectation of growth. If you see something positive coming up in the next couple of years, the wait could be very beneficial as many sales are based on multiples of EBITDA or some other operating factor.  Will the industry be taking a downward or upward turn?  Is your business seasonal?  Is a major competitor coming online soon?  Take all of this into consideration as timing could be everything.
  7. Don’t Go It Alone – Business owners make this mistake all the time. They are smart enough to build a successful business so they think they are smart enough to sell their business on their own.  Unless their business is selling businesses, then that is usually not their strength and the cost of professional help is almost always worthwhile.  A CFO advisor, an investment banker, a business broker or an M&A lawyer are good places to start, depending on how sophisticated your situation is.
  8. There are a host of other areas that you should also consider in your preparation depending on your business and industry:
    • Clean up offices and your warehouse. Make sure it looks professional and organized.
    • Review your compliance issues to ensure you don’t have problems from a tax, legal, governmental or environmental perspective. Or at least identify these and assess the risks.  You don’t want surprises at time of sale.
    • There will be different concerns from a buyer depending on if they are a financial buyer (view your business as an investment and looking for return on investment and strong management) or a strategic buyer (usually a company that thinks your business is a good synergistic fit to their current business).

Who Can Help?

  • CFO Advisor (of course) – Get your financial house in order and create processes to standardize operations. Coordinate with other service providers listed below.
  • Investment Banker – They know how this works, how to present and help negotiate the best deal. They can help sell, but also raise capital for general business needs.
  • Business Broker- They too know how this works, how to present and help negotiate the best deal. The Broker versus Investment Banker may just be a matter of the complexity and size of the sale or who you are comfortable with.
  • M&A Lawyer – You always need to be fairly represented no matter who you are selling to. They will bring a perspective that the others won’t.
  • Tax specialist – Make sure your house is in order and determine the best tax structure for sale.
  • Investment advisor / Estate planning lawyers– What are you going to do with that cash when you get it? They can help you express your goals and establish a structure to meet those goals.
  • Other service providers:
    • Insurance – Ensure you have the right assets and business exposures covered.
    • HR Specialist – Ensure you don’t have any potential liability issues along with sound policies.
    • IT Specialist – Sound platforms, secure data and disaster recovery programs.
    • Social Medial Experts – Depending on your business. How does that website look?
    • Others, dependent on industry and circumstances.

You may need all or just a couple of these advisors to make a sale successful, but the key is to be thinking about what you need and plan.

Would you like to learn how Nperspective CFO & Strategic Services can help your business? Click HERE to schedule a call.

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