How does the old adage go? "If you love something let it go?"
Whether you're looking to start the next chapter of your life or abandon a sinking ship, deciding to sell your small business is half the battle. The other half is the who, what, when, where, how, and why to sell.
Enter: an Exit Plan.
We're here to share how to start exit planning for your small business so that you can build a legacy to leave behind and secure your financial future.
The Exit Planning Process
Unfortunately, you cannot wake up one morning and decide to sell your business. If only it were that easy. It's a lengthy process that requires early planning and development in order to end in a successful transaction. According to The CEO's Right Hand and Summit Financial Group, that process can be summarized into six steps.
1. Establish Owner Objectives and Readiness
Ask yourself, "What would I like to achieve with my exit?" Financial security? Financial freedom? Product, service, or brand diversification? An endowment to leave to your children, and your children's children? An accumulation of all of those things?! Whatever the end goal looks like for you, an exit strategy centered around that objective is crucial in sustaining your future lifestyle.
Future lifestyle in mind, part of the exit planning process is assessing your financial and mental readiness in selling your business, or what it needs to be in order for you to sell. While preparing to be financially independent outside of your company is difficult, the bigger challenge you'll face is if you're ready to be identified as someone other than the owner of your small business.
2. Discover Which Type of Owner You Are
There are four categories a business owner falls into depending on their mental and financial readiness:
Rich and Ready To Go (financially and mentally ready) = ready to start life's next chapter.
Wealthy But Enjoy Work (financially ready, mentally not) = like working and not ready to retire.
Get Me Out Now (mentally ready, financially not) = your financial needs require more from the business even though you already have one foot out the door.
Stay and Grow (financially and mentally not ready) = happy to continue working to build net worth and company value.
There is no superior category or any shame that should accompany where you are at financially and mentally. These just simply dictate which exit strategies are best for you and your small business.
3. Choose an Exit Strategy Right for You and Your Business
Depending on which category your ownership style and readiness falls into, there are different strategies to choose from when it comes to planning your business exit. Here are five common exit strategies for small businesses:
Liquidation is the process of closing a business and selling off its assets or redistributing them to creditors and shareholders. It usually occurs when a company cannot pay its obligations when they are due. There are two ways to do this: Close and Sell ASAP or Liquidate Over Time
Liquidating quickly is often a last resort method where you make money off the assets you can sell, but lose other valuable items like client relationships. Any money made from the assets sold also must go to indebted creditors first. The benefit to closing and selling quickly is that it is a relatively simple exit strategy and depending on asset sale, a quick closing process.
Liquidating over time is also referred to as a "lifestyle business" where the business funds go directly into the owner's pockets over time instead of being reinvested in the company. When those funds run out, the business closes. The benefit to this exit strategy is that you have enough cash flow to maintain your lifestyle, but growth and sales will be stunted with other investors potentially getting upset with the money allocation.
Selling to Someone You Know
Whether you are already in a family-run business or looking to establish one, selling to someone you know has its pros and cons.
Selling to someone you know is not always the "easy solution" you might think. With any exit strategy and business sale, you'll still want to involve attorneys, accountants, and other family successors when planning the business transition to a friend or family member.
Selling in the Open Market
As mentioned in our Guide to ETAs, more and more young entrepreneurs are looking to buy established small businesses rather than start one from the ground up. Which is good news for those looking to sell, particularly boomers. In order to sell in the open market, however, more exit planning efforts must go into preparing your business in advance to make it appealing when attracting potential buyers. If your business is in good financial and market condition, then it will likely be attractive to buyers. However, selling in the open market can often be a long and tedious process with the chance you will not receive the selling price you want.
Related Reading: The Beginner's Guide to Entrepreneurship Through Acquisition
Selling to Another Business
If not an entrepreneur, then sometimes another company may want to acquire your small business, either to strategically grow their enterprise or eliminate the competition. Selling to another business is a good option for an owner that wants to continue working in their industry with less responsibility because they are usually offered a position within the new company. So not only do you benefit from the high price of your company sale, but you will also have a steady income from continuing the lighter workload. That benefit comes at a cost, however, as the company culture and systems might clash/change and many of your previous employees may be laid off during transition.
IPO (Initial Public Offering)
Also, known as "going public", an IPO refers to a business selling its shares of stock that were initially privately held, to new investors in the public market. *insert Wolf of Wall Street reference.*
Your business is subject to more reporting requirements and a tightened rein on business decisions; however, going public can be financially and reputedly profitable by boosting publicity and brand awareness.
4. Find the Right Buyer
You've decided on the exit strategy and are ready to find some interested buyers for your small business. We have moved beyond your independent capabilities now, so it is time to hire a). an investment banker to conduct and navigate the sale and b). specialists that understand your industry and have sold your type of business before. Both parties are there to package and market your story, demonstrate your company's value, and most importantly, connect you with the right buyers who are serious about the purchase. They then filter through the interested buyers to find who is a good fit for your company and start to structure the deal.
5. Negotiation and Legalities
Finally. Buyers are presenting their offers. Or should be hopefully. The two high-level elements of the offer to know are price and terms. Price refers to how much the buyer is willing to pay — obviously — and terms refer to the criteria for completing the sale and how the buyer will pay — not as "obviously."
This step in the process is called "NEGOTIATION and Legalities" for a reason. Finding a win-win is the end goal and the way to do that is by being flexible. Buyers don't typically offer a good price AND good terms, so go into negotiations knowing what you need walking away from the sale of your small business.
Something to keep in mind is when a company fails to close a deal, it diminishes the business value in possible future deals.
6. Navigate the Transition
You have found your rock star buyer. The deal is closed and your exit plan has paid off. Depending on the terms of the sale, the transition will look different for each business. The owner could remain involved with the company for a couple of more years, existing employees could be replaced, and key software and systems could be changed. The better the planning in earlier steps of the exit planning process, the more seamless the transition of leadership.
You have put in blood, sweat, tears, long hours, and every spare dollar into your business, but it is time for your next adventure. For financial assistance during this stressful time, Flagship Bank Minnesota is here for you. Speak with one of our personal bankers today to start your next professional journey.
Check back at The Helm next week to find out what that next adventure could be.