SELLING A BUSINESS

Dec 6, 2022

When should I start exit planning for my business?

It's never too early to start thinking about exit planning, even if you're just starting out in your business. In fact, it's especially important to start thinking about exit strategy early on, because it can help you make decisions and take steps that will give you a smoother process and higher selling price for your business.

For example, if you need to hire a key employee to handle estimates for new projects or build up your customer support team for major clients, it may take over 6 months to find someone great and train them up to full productivity. 

If you wait until you need to sell, you simply won’t have enough time to maximize the value of your sale. A good analogy we like to use is selling a car. If you want to sell a car, you don’t leave all of the junk in the trunk and sell a dirty car. You get the car detailed, take nice photos, get the CarFax report ready, and get an inspection report that you can show to a prospective buyer.

Exit planning is a similar exercise.

What Is An Exit Plan?

An exit plan is a strategy for selling a business. It typically includes a detailed plan for transferring ownership of the business to a new owner, a survey of the potential buyers of the business, the current market conditions for your industry as well as a timeline for implementing the plan. Included in the plan is typically a ballpark estimate of what the business is worth today as well as a few initiatives that can increase the business valuation within a certain timeframe.

In a perfect world, an exit plan is formulated at least 3 years prior to the sale. This will give business owners time to financially plan for the future and maximize the sales price of the business.

The goal of exit planning is to maximize the value of the business and ensure a smooth transition from the current owner to the next owner.

Do Most Owners Have an Exit Plan?

Unfortunately, no. According to Bakertilly, 83% of business owners have no written master plan. This is despite a vast majority of small business owners having 90% of their net worth tied up in their business.

What Are Risks of Waiting Too Late?

If owners wait too late to plan their exit, they run the risk of selling their business at a lower price or sometimes not being able to sell at all. This is especially true when the owner has not invested in reporting income to the IRS and has a number of family members working in the business.

At Beacon, we always hate hearing about instances where owners are forced to liquidate off their assets rather than sell their businesses as going concerns.

What Are Common Ways to Increase the Value of My Business?

• Reporting Income to the IRS: Banks will use your business’s tax returns to calculate how large of a loan they would extend to a buyer. If you have not been reporting income to the IRS on your business tax returns, you will likely have trouble selling the business for its true worth.

• Transitioning Family Members Out of the Business: The fewer family members involved in running the business day-to-day, the higher the sale price will be for a new buyer. The more family members involved, the greater the transition risk as the new buyer will be forced to make a number of hires on day one to even sustain the business, much less grow it.

• Keeping Equipment Up to Date: Aside from reporting income and making the business transferable, it’s important to keep equipment up to date. You don’t get many bonus points for having the latest and greatest equipment, but it is important that key pieces of machinery are up-to-date enough that the buyer does not need to invest hundreds of thousands in the first year. 

• Cleaning Up Bookkeeping: Lastly, it’s important to start to shore up bookkeeping practices. Buyers will want to perform due diligence on customer concentration, the rate at which customers may churn from the business, and how long the average customer has been loyal. Good bookkeeping practices will make this easy.

• Renew Your Lease: If you rent your property, it’s important to have a long-term lease in place for the real estate. This is doubly true for businesses that have customers come into the space. 

How Do I Get Started Exit Planning?

Our recommendation is to seek out the advice of experienced advisors. In a perfect world, your exit plan will be the byproduct of a qualified business broker or exit planner as well as your personal financial advisor.

Some owners rely on their current attorneys or CPAs to help with exit planning. While these professionals will be crucial during the actual sales process, the danger with relying on them for exit planning is that their specialty is not business sales. The average CPA or business attorney may only see one to two business acquisitions per year. Their numbers or benchmarks may not be the latest data and could set the wrong expectations.

Can Beacon Help Me With an Exit Plan for My Small Business? 

Yes! We perform complimentary valuations for any business owner earning between $500K and $5M per year. We also have a number of Certified Exit Planning Advisors in-house, including myself, John McCleary.

Please reach out if we can be of any help as you consider planning your business exit.

John McCleary

Transaction Advisor

Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.