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By: Lauren Altschuler, CBI, CEPA
If you are like most business owners nearing retirement you may be tired or feel like you’re drowning in the day-to-day operations of your business. If you are dreaming of retirement to be able to spend time with family, relax, or travel the world, you may want to consider an exit plan. As a small business owner, it’s easy to get caught up in the hustle and bustle of running your business and neglect planning for the future. But if you want to ensure a successful exit, it’s time to start preparing your business at least five years ahead of time, for succession or sale.
Five Key Steps That Will Help You Start The Exit Planning Process:
1. Consider Whether You Are Financially and Mentally Ready
Preparing your business for sale is just the first step – you also need to be ready mentally and financially. Many sellers want to know the best time to sell their business, but the truth is, it’s when the business is running smoothly and generating a lot of cash. If you don’t have a post-sale plan, it’s important to start thinking about what you want to do next. If you’re not mentally or financially prepared, it may be best to wait until you are. So, how do you know if you are ready? Answer these questions. Do you have a solid game plan for how you will spend your time after the business sells? Have you been working with a wealth advisor and tax accountant to understand A) How much you need the business sale to generate in order to be able to live comfortably and B) Do you understand the tax consequences of the sale, and how much money you will have after all the business and sale expenses have been paid? These include advisor fees, paying down business debt and taxes.
2. Conduct a Business Valuation and Document Your Inventory, Furniture, Fixtures and Equipment
If you’re considering selling your business, it’s important to know its true market value. An M&A advisor can help you assess the current market climate, understand buyer evaluation criteria, and determine the value of your business. Knowing the market value of your business will help you determine if now is the right time to sell and provide a benchmark for improvement. It’s important to clean out obsolete equipment and inventory and write it off. It’s also key to know exactly what current inventory and FF&E the business owns.
3. Clean Up Your Financial Statements
To make your business attractive to buyers, it’s essential to clean up your financial statements. Hire a bookkeeper, controller, CFO or fractional CFO to help ensure the balance sheet and income statement are accurate and follow accounting best practices. Remove any personal expenses from your income statement, such as salaries of nonworking family members or discretionary expenses. Most buyers will want to look at the last three to five years of your company’s cash flow, so it’s important to ensure your financial statements are accurate and trustworthy. If you are running personal expenses through the business, you want to stop doing that five years out from a sale. The value of a business is based on a multiple of cash flow. If you are keeping profits down to avoid paying taxes, you will lose the multiple of that cash flow when the business sells.
4. Consider Who Buyers Might Be
While it’s impossible to predict the future, preparing an exit strategy can help you be ready for unexpected events. Consider who you might sell your business to, whether it’s an heir, a business partner, an employee, or an outside party. Determine if liquidation would be the best option, or if you’d like to retain a position on the board or be involved in the transition process. If an employee is being promoted to fill your shoes, consider providing leadership or other training. Your plan will ultimately influence how you run your business.
5. Make Your Business Attractive to Buyers
To get the most return on your investment, work on increasing revenues and profitability for at least three years leading up to a sale. A business that is attractive to buyers will present positive cash flow, customer diversity, recurring revenue, and well documented and efficient processes and systems. The more you can remove yourself from the day-to-day operations of the business, the better. Consider what drivers will determine how successful your business is in the future, and work with a financial analyst or exit planning advisor to help you improve value. Be transparent about any weaknesses the buyer’s due diligence team may find, and fix any issues before bringing the business to market.
By following these steps, you can prepare your business for a successful exit. Planning ahead will save you time, money, and heartache, and put you in a much better position to negotiate. Remember, your business is your baby, and you want to ensure you get the return on investment you deserve, and that it’s in good hands when you’re ready to move on.
Lauren Altschuler, CBI, CEPA
Lauren is a Certified Business Intermediary (CBI) and a Certified Exit Planning Advisor (CEPA) with over 30 years of business and M&A experience. Lauren helps business owners achieve their business exit goals through a successful merger or acquisition. She is a business advisor at Transitions In Business, a Twin Cities based M&A firm that specializes in selling business to business and healthcare, transportation, manufacturing, distribution and construction/trade services companies.