Company Exit Strategy: Is Selling Your Business the Right Exit Strategy for You and Your Business?
While we hear a lot about starting a business, it is not every day that we hear about leaving a business. There are many reasons why people consider exiting a business; no matter the reason, it is always good to ensure that you meet your business goals and get a fair return on the sale. There are several exit strategies a business owner can choose from when they have decided the time has come to exit the business. Here, we discuss two basic types of sale: selling the business to a singular friendly buyer and placing the business on the open market to be acquired.
How far in advance should I plan my exit?
Before putting the business up for sale, it is important to get prepared. How long in advance should you prepare? Ideally, businesses should start planning an exit strategy from the very outset of starting the business. And by this, we mean, it really helps to be organized from the start. This is not often the case, so if you are planning to sell your business, you should start preparing immediately. Begin by getting all of your records in good order; important records include tax returns, financial statements, cash register receipts and any other document that demonstrates income and expenses. Bank financing with SBA backing needs two years of clean financials. And eventually, the prospective buyer will want to inspect these records during the due diligence stage of the selling process. A broker and accountant will also want to see them when it comes time to value the business. So it would be great to optimally run your business for these two years to maximize your value. Also, if your business has a lease with a property owner, it will need to be transferrable and long enough for a buyer or bank to be satisfied.
As you plan your exit strategy, try to keep your business going strong, and even consider ways to improve; strong sales and profits will continue to boost the value of the business right up to selling time. You can also start thinking about any “personal touches” or knowledge that make your business run successfully. Once you identify them, you can record these strategies to help provide training to the buyer and ensure your concept remains successful in the future.
Now that you have the basics of sale preparation, let’s look at two ways to sell the business.
Selling the business to a friendly buyer
Selling the business to a friendly singular buyer means selling the business to an “internal” buyer you know and trust and who would like to continue your business’s legacy. This method has a few advantages: you do not need to look for an external buyer, the transition is relatively smooth and the business can keep on running as usual. You have the benefit of knowing that your buyer is highly interested and invested, if this is an important factor for you.
A “friendly buyer” could be a family member, customer or an individual already involved in the business, such as a co-owner, employee or manager. Selling to employees works exceptionally well when you have a dedicated and familiar team in place that believes in your business, while many family businesses like the idea of passing the business on to the next generation.
There are some issues with this process, however. In these kinds of arrangements, negotiations can be less than objective and you might leave money on the table out of consideration for the buyer. We often say in our business “if you have one buyer, they have you”. In singular buyer sales, the seller often provides a large amount of seller financing that allows the buyer to pay for the business over time as these buyers often have little cash. This can be a problem if the business’s revenues drop due to your absence or any other unforeseen issue. In this case, you will not be guaranteed to get the selling price that may have motivated you to exit the business in the first place. Your familiarity with the buyer may mean that they will contact you with questions or ask for your involvement to save the business, which could be a bad scenario if you were determined to exit the business entirely.
As for families, “Only about 40% of family businesses make it to the second generation, 12% to the third and 3% to the fourth”. Passing the business on to family has also led to disputes within families for control over the business. Sometimes, for all parties concerned, it is best to sell to the open market.
Placing your business on the open market to be acquired
Selling your business on the open market is the most popular option for small businesses. These sales involve two major categories of buyers: individual buyers who want to become small business owners and larger firms interested in acquiring your business as part of their existing company (aka strategic buyers). Either buyer could be a great opportunity for the seller, but managing this process can be extremely overwhelming. That is why we highly recommend you have a professional team on your side which includes a business broker, experienced deal attorney and CPA.
In the first case, an individual buyer is looking to buy a business to replace an income or become an entrepreneur. Typically, this will be someone with related but not direct experience in running the type of business you currently operate. This is a good thing as they will then pay for your expertise and good will. And another benefit is the individual will most often continue operating the business you started, and they most likely retain key employees.
In the second case, marketing your business to companies interested in acquiring your business in order to make it part of their own company or part of their expansion plans. This is an ideal selling option for high-growth businesses that make over one million dollars in earnings. Large companies are able to spend more money than an individual, and they may gain some economies of scale, thereby increasing the valuation of your business. After the sale, your business may not look quite the same, as it can be transformed into a subsidiary or division of the buying company. Acquiring companies may also want you to stay on to manage your business. These deals can get very complicated and it is very important for you to be properly represented.
Exit with the Help of a Business Broker
No matter your exit strategy, it is critical to conduct the sale with the help of a trusted business broker or advisor. Simply putting out the proverbial “for sale” sign can greatly affect your business’s value, driving away employees, customers, and vendors. Business brokers and advisors like Transworld keep your sale confidential, offer the utmost expertise in valuing your business, and ensure that you get the best price possible. Also making sure that the best buyers are attracted to your opportunity takes the effort of a worldwide network that Transworld has like no other company.