Planning for the exit of a business is a crucial stage that every business owner must eventually face. Whether you will be selling your business, seeking an equity partner, or are considering a merger with a company that’s complementary to yours, it’s important to navigate the process carefully.
In this series, we will explore exit planning and what business owners should know when considering the sale or transfer of a business. From managing the early stages of exit planning to transaction strategies every business owner must master, to knowing when to walk away from a deal, we will cover topics that business owners need to know. These articles will delve into important considerations such as why finding the best buyer or equity partner for your business typically takes less time, usually results in a smoother process and a higher sale price than the holy grail of finding the right buyer or equity partner. We will uncover how long it takes to actually sell a business and the factors that impact timing. And we will discuss the common pitfalls that can jeopardize a sale or M&A transaction. So, let’s dive in and explore the insights that will empower you as a business owner in effectively planning and preparing for your exit.
It All Starts With Proper Planning - Managing The Early Stages Of Exit Planning: Setting The Stage For A Successful Transition
Planning to sell or exit your business is a big step, one that requires careful thought and strategic decision-making. It’s like preparing for a new and exciting chapter in your life, because that’s exactly what it is. But the difference between the journey being smooth and rewarding or difficult and stressful is a result of how well, and how far in advance, the planning is done. Managing the early stages of exit planning will set the stage for a successful transition.
When considering or preparing to sell your business, it’s best to put first things first. And the first thing is define your objectives. Why do you want to sell? Is it time for retirement, or are you seeking new opportunities? Maybe you want to maximize your return on investment. Understanding your goals will shape your exit plan.
Next, it’s important to assess your business’s market value. It is important for you to know what your business is worth in the current market. Although many business owners have an idea of what they believe their business should be worth, that number often doesn’t align with what the market would dictate. Owners should consider getting a professional business valuation to help them set realistic expectations and make informed decisions.
Now, let’s talk about the business’s financials. It will be important for you to take a detailed look at your financial records and clean up your books. This means making sure everything is accurate, up-to-date, documented and well-organized. Decreases in revenue are not dealbreakers if they can be explained along with well-crafted support documentation.
Potential buyers are buying more than just the business and its assets, oftentimes they are also buying the people, especially the management team. Having a strong management team is essential. It shows that the business will be able to thrive when the current owner is no longer present.
Evaluate your current team to identify any gaps that need to be filled and to make sure the best people are in the right seats. Investing in the development of key employees or hiring new talent can enhance the stability and value of your business. Streamlining your operations is another important step. Document processes to reduce the perceived dependency on your day-to-day involvement. This makes your business more scalable and attractive to potential buyers.
Buyers don’t like unchecked risk. A big one for them is a company that, from a customer, product, or industry standpoint, has all or many of its eggs in one basket. Buyers know that if that customer leaves or a particular product or industry segment declines (consider the impacts AI is expected to have), a good portion of that business may be impacted, which can decrease the sale price…and the money you receive! If possible, seek to diversify your customer base to reduce those risks. Seek new clients and explore new markets. This shows potential buyers or partners that your business has room for growth.
Another area that is often overlooked is making sure the business is compliant with laws and regulations. It is an extremely good idea to review current licenses and other legal documents to address any potential issues. Reviewing contracts is also strongly advised, making sure they are actually signed. Zero credence is given to contracts based on handshakes and verbal agreements or the long-term relationship history with a customer where buyers are concerned.
Crafting an exit plan is crucial. It should outline the steps you’ll take, the timeline, and the potential buyers or successors you’re targeting. Consider contingencies and alternative options in case your initial plan encounters obstacles, which it likely will.
But remember, you don’t have to go it alone – and it’s best not to! Whoever buys your business is certainly not going to go it alone. They realize that they will be making a significant capital expenditure and have just one shot to get it right. To make sure they do, they will bring their A-Team to the table who will work to get every possible advantage.
So do not be outgunned. Owners who are selling need to have and bring their own A-Team, one that consists of an attorney, accountant, M&A advisor, etc., whose expertise and experience will help them make the best and most informed decisions, and help them maximize the sale of the business.
In conclusion, managing the early stages of exit planning requires thoughtful consideration and proactive steps. By defining your objectives and developing an exit plan, and seeking professional guidance, you’ll set the stage for a successful sale of your business. It’s an exciting journey, and with proper planning, you can confidently embark on your next chapter.
In our next article we will focus on the most important things to consider when selling your business.
