Does Your Business Need an Exit Strategy? By Joe Edge
Does Your Business Needs an Exit Strategy?
By Joe Edge
Buying or selling a business is one of the most challenging processes one can go through. It’s not a common practice and there’s a limited community of professionals to offer advice and support. Having started on the business brokerage side of commercial real estate, I’ve seen a lot of mistakes on both sides of the table. This month I’m looking at how to “sell” a business and next month we will look at the “buying” side.
Initially, you need to place a high value on properly determining the worth of the business. It is important to research values of similar businesses in your industry, along with the history of previous sale prices. Do some comparative studies on this and determine what the rules of thumb are for your industry. Brokers can be a good source for this info and will often know what the worth of your business is, but you have to be careful that they are not valuing it at an aggressive price just to make a quick sale.
The next task to tackle is cleaning up your financials. Almost all businesses sell on some form of a multiple of EBITDA (earnings before interest, taxes, depreciation, amortization). This number is your true net income after you add back any discretionary expenses, such as your personal car expense or insurance. Try and run your business for a solid year or two with the books as clean as possible with very little fluff or confusion. You may have to pay more in taxes by not expensing every small payment, but this will pay dividends when it comes time to sell.
Next, be diligent at operating your business as though you are going to own it forever. You cannot rely on a deal until it is finalized with the last payment. Some deals see a painful demise at the closing table. Don’t slack off! Always operate your business with determination and excellence.
Keep everything confidential. Do not under any circumstances let your employees or your competitors know what you are planning. Even if you want to confide in one key employee, don’t give in to temptation. Your employees shouldn’t find out until the day after the transaction is complete. If your competitors become aware of what you are doing they will come after you. You can count on them to capitalize on a competitive advantage to grow their business. If you foresee your competitor as a likely buyer for your business, then have them sign a confidentiality agreement before you divulge any information, and be very methodical about what you give them. Don’t seem too eager! Be cautious on the reasons you give for selling the business. You don’t want to reveal information that could hurt you if they decline the sale.
Lastly, here are a few nuggets of advice. Be prepared for a stressful process. Don’t be forced into selling because of personal life events. Consult with competent brokers who know how to counsel you through this process. Make sure you understand all of the tax implications. Most businesses do not get 100% of the purchase price at closing. Make sure you are comfortable with who your buyer is and their ability to make the business a success. You want them to be successful and expand on what you spent your life building. Methodically plan in advance your exit strategy.