Planning an exit strategy for your business
A business exit strategy is a plan a business owner-founder makes to sell their company, whether to a third party, family members, partners or employees. As you prepare your business exit strategy plan, keep the following considerations in mind.
1. Set a timeline for your business exit strategy.
In the most common circumstance, you may be looking to sell as you approach retirement. In this situation, don’t expect to make a snap decision to put the business on the market and be detached from it quickly. You want enough time to reduce or eliminate risks that might lower the value of the business, and a major risk for the buyer is the imminent departure of a business owner who is still the key employee of the firm. That situation could negatively impact the company’s value in the market.
If the sale is tied to retirement, you should consider factoring retirement into the exit strategy and plan to remain with the business for a period of time. Buyers may be more attracted if you agree to remain actively involved for two-to-three years to help facilitate a smooth transition. An alternative is to have a qualified replacement designated before new ownership takes control.
2. Have your financial records and sales objectives in order.
It’s important to have accurate and up-to-date financial data ready to show potential buyers as part of your business exit strategy. It might take one-to-two months to pull together all the information they expect to see. It includes:
- Up to three years of historical financial performance, including monthly information for the past two years, plus year-to-date numbers for the current year to give buyers a sense of performance and trends
- Descriptive information about your company, its customer base and its strength and weaknesses
- Organizational charts and identification of key employees
- Insights into the competitive landscape in which the company operates
If your business has one, the support of a strong controller or chief financial officer can be instrumental at a time like this. Smith also recommends an outside, independent accounting firm review the numbers to validate the information you’re providing to potential buyers.
3. Selling your business to a third party.
The search for potential buyers can be done in conjunction with the background work that’s underway. As you begin the process, consider what you’d like to accomplish from the sale. Owners who want to maximize the value for their business are likely headed toward a competitive auction to find a buyer who offers the best price and terms. In that instance, the universe of potential buyers may be quite broad.
Yet in some cases, while still seeking a full and fair price, founder-owners may have other considerations in mind. Many are concerned about the future for their employees and want to find a buyer who will keep the business functioning and keep their employees on the job. "Top dollar" isn’t top on the list if it means eliminating a number of jobs to achieve this. In this type of situation, the search for a buyer may be narrowed. The focus turns to finding a good cultural fit.
Typically, indications of interest from potential buyers are solicited and initial bids are provided. These tend to be ballpark estimates that don’t necessarily resemble the final agreed-upon sales price. After you determine which offer looks most appealing, the next step is to obtain a letter of intent. While generally not legally binding, the parties are agreeing on a roadmap to a definitive, binding agreement. Even at this point, there may be another four months or more left in the process, assuming all goes well.
Some potential buyers may want to dig more deeply into the company’s financial and legal records and even go so far as to talk to some of the company’s customers. Buyers often have an accounting firm conduct a “quality of earnings” analysis to verify that the numbers being reported are accurate. After all of this is completed, final negotiations can get underway.
4. Selling your business to partners or employees.
In some cases, the potential buyers of your interest in the business may come from the inside. If there are partners in the ownership, one partner seeking to sell may try to come to an agreement with other partners in executing a sale.
The big question when selling to a partner is to what extent the partners are on the same page. Good communication that leads to alignment on priorities is important to help facilitate a smooth transition.
Some business owners want to create an opportunity for employee ownership of the firm as part of their business exit strategy. This can be accomplished with an Employee Stock Option Plan (ESOP), which is a trust and is incorporated into a retirement plan for an organization. It offers tax advantages for the seller and for the ESOP as ultimate owner of the company. Employees who participate in an ESOP will be vested in the plan after a specific number of years, which encourages them to remain with the business over the long run.
However, an ESOP doesn’t work for all businesses. It may be most appropriate for companies where the chief asset is human capital. This can include architectural, engineering and accounting firms.