This is a very busy time of year for me. Along with the natural part of the business, there are many outings, gatherings, and networking events that I attend at night. There is a question that inherently comes up in every conversation that I have when meeting new people. “So what do you do?” The funny thing is, every time I leave an event I always reflect on this question and how little people understand about exit planning. After I explain how I help business owners I always get follow up questions such as “So you are similar to a business or life coach?” or “You are a business broker?” Those are the typical responses from other service providers. However, when it comes to actual business owners I typically get a response such as “I don’t plan on selling for 5-10 years” or “I am going to work until I die” or “If I ever decide to sell I will reach out.”
The interesting thing about all these interactions is really two-fold. One, most people really do not understand what exit planning is. Two, most people think that exit planning is an event rather than a process. While this blog is not designed to differentiate between a business coach or a broker, it will highlight the importance of Exit Planning for a business owner.
- Exit Planning is Business Planning.
This is the single most important thing to understand about exit planning. While the title can be deceiving the process of exit planning sets your business up to be more valuable in the future. Part of the process is a decision at the end of every year to the business owner on whether they want to keep, sell, or grow their business. Keep and Grow are by far the most popular answer. The reason is that by implementing exit planning the business owner will free up time, create a personal and business plan that is aligned for their views, and have a business that operates more efficiently. While there are many other benefits as well, these are some of the big hurdles that business owners face. Recognizing, planning, and dealing with these issues will not only make your company more valuable to sell it will also make it more rewarding for NOW.
- Effective Exit Planning takes time.
Unlike selling a house where you can quickly do some landscaping, add a fresh coat of paint, and stage a property to get top dollar, getting top dollar for a business takes time to implement. Similar to selling a home though, a turn-key business will get a higher valuation. Many times a business is extremely reliant on the owner or a few key customers. While this can create a nice lifestyle for the business owner it also leads to a business that is not worth much in a sale. While there are many reasons a business is not turn-key, these are two important ones and putting processes in place to have the business run with more reliance on employees than the owner along with a strategy to diversify your customer base will take a few years but will make a company significantly more valuable.
- Financials are important.
When you go to sell your business, especially for smaller businesses, the first thing a prospective buyer will look for is the last 3 years tax returns at a minimum. A very common issue that I find is that year to year tax planning is not helpful when you go to sell the business. An accountant’s job is to minimize taxes every year by showing as little income as possible. This includes but is not limited to personal expenses getting pushed through the business. If you have a business that is showing little profit you can imagine the prospective buyer might get cold feet, not to mention that it can be more difficult to get approval from a bank for financing. Working with the accountant and knowing Seller’s Discretionary Earnings inside and out will help speed up the LOI from buyers and will speed up the process to actually close the sale of the business. It is a lot easier to be proactive with this planning than trying to explain years of tax returns after the fact.
- Exit Planning is Not Solely About Your Business.
This is an area that often gets overlooked. Effective exit planning makes sure that both your business and personal goals are aligned. Many times there is a life event such as sickness, death, or divorce that forces a business sale vs selling the business when the owner is ready. Additionally, there are many instances where the personal financials of the business owner will not be met when they sell their business. There are many perks of being a business owner such as insurance, cash flow, and tax write-offs that will go away once the business is sold. A realistic look at what the post business lifestyle will look like is a necessity. There are also more esoteric things to consider such as what you will do with your free time and how does your spouse feel about it. Sometimes these answers are easy and other times it takes several discussions to realize what the owner and his family want. Often for a business owner, running the business is their identity and post-sale can be a very difficult period.
There are many other facets to exit planning for a business owner, but these are a few of the more important things to highlight. For most business owners, their business is their biggest asset and planning for eventual exit needs just as much attention as they provide on the daily operations of running the business. The earlier the business owner starts the planning, the better off their outcomes will be and the more likely they will have a successful exit.