Small business owners pour their hearts and energy into their venture, so the decision to sell marks a significant milestone in their entrepreneurial journey. Ideally, it comes at the time of their choosing – whether they want to retire or pursue new opportunities. Yet even when small business owners feel ready, the finality can cause a bit of ambivalence.
If you’re looking ahead to the eventual sale of your business, you want to ensure a smooth transition – and maximum value. Here are some of the challenges you may face and what to think about today, no matter how far off the eventual sale may be.
When Is the Timing Right for Business Exit Planning?
One big mistake I frequently see small business owners make is focusing primarily on the timing of their exit. In reality, that’s a backward approach. Instead, you should place emphasis on implementing actions today to increase your business’s value and ensure a smooth transition in the future.
One useful model, the “Value Acceleration Methodology,” comes from the Exit Planning Institute (EPI). In this approach, a business owner begins with a “triggering event,” which is defined as a personal, financial and business assessment correlated to the business’ range of value (EBITDA x range of industry multiples).
By completing a triggering event, a business owner determines the present value of the enterprise, which they can compare to the value of best-in-class organizations in the same industry. The goal is to determine what the business owner needs to do in order to boost its value to make it more attractive to the eventual buyer.
The triggering event will establish the probability of success as it relates to growth and transition strategies. Most importantly, it identifies existing gaps, such as a profit or value gap, compared to other best-in-class businesses, along with the wealth gap, which refers to the amount the business owner needs to walk away with in order to live the life they envision. Once they know the end goal, they can identify the actions required to protect, build and harvest value at exit.
Growing Your Business’s Value Before Executing an Exit Strategy
By completing a readiness assessment, an owner will have a better understanding of where they fall within the range of values (ROV) for their business. The ROV is based on a multiple determined by private capital markets and while an owner doesn’t control the range of value, they can make adjustments to where they fall on the continuum.
Once they’ve identified weak spots, they can begin to increase their value. The three main ways to accomplish this are:
- Increase earnings
- Reduce risk
- Become positioned as best-in-class in that sector
To move the needle, a company has to maximize its top value drivers. These factors include:
- A history of recurring revenue
- Holding a niche in a growing market
- Owner independence, meaning that the business can run without the owner in place
Conversely, the top value killers include:
- Over concentration, such as having only one main profit line or one or two key customers who hold significant pricing power
- Poor financial systems and reporting (one of the top deal killers I see)
- Lack of succession planning
Creating a Sound Business Exit Strategy
There are a few mistakes that often occur among owners seeking to sell their business. One of the biggest barriers to success is not attaining full value because they have failed to complete a triggering event. Time and again, I see profound regret seep in among owners who didn’t receive sufficient funds from the exit to support their post-exit goals.
Taking the step of business valuation also ensures you are prepared. Once you begin the sales process, it seems to progress in the blink of an eye, so you’ll have a better outcome if you already know what you’re looking for.
Finally, I see that potential sellers fail to disclose adequate information in the offering memo. Eventually, all the facts will come out, and this lack of transparency can erode trust. Better to put an NDA in place and share the entirety of your business so the prospect has all the details they need.
Forging the Right Approach by Aligning with a Dedicated Team of Business Exit Planning Advisors
If your business has achieved an impressive stature, you might find yourself approached by private equity or strategic buyers. While that can be exciting, it’s important to pause and create a strategic method for the next steps.
The first thing to do is create your core deal team, which should consist of:
- Senior management
- Wealth advisor with a credential like a Certified Exit Planning Advisor (CEPA) or a Certified Exit Planner (CExPTM) acting as quarterback
Then, reach out to an intermediary to help broker the transaction. Smaller businesses with less than $5 million in sales will typically use a business broker, while those with between $5 million and $1 billion in sales usually tap a merger and acquisition advisor.
Before you begin this step, you should already have determined what your business is worth and what you need to walk away with. Otherwise, you might be offered what feels like a good deal and later realize you left money on the table because you didn’t have it valued – and that’s when the regret can kick in.
Planning for the Life You Want After You Sell Your Business
However, it’s not just about the business value. You also will feel more positive about the process if you have a clearly defined vision for your life after the exit. Even if you think you might be staying on for a certain period, many former owners realize the culture is no longer a fit and leave sooner than they had expected. That’s when you will appreciate that you have already mapped out your goals.
I like to compare your post-business life to an investment portfolio that has an array of asset classes. You need to build your time portfolio in that same way. Be specific about how you will allocate your time among your various priorities: travel, family, hobbies, an encore venture, even charitable goals, whether you’re giving time, money or both. One helpful acronym is “STEP: Spiritual, Things, Experiences, People,” where you determine what’s important in each of those categories.
Once you start thinking about selling your business, you’ll be surprised at the speed with which the transaction goes. Make sure you’re ready in every facet of your life.
Would you benefit from a conversation with a Carson Private Client Strategist? Contact us today to find out more about how we can help you reach your business, personal and financial goals.