Many times when I’ve asked a business owner what their exit strategy is I get a statement such as “oh, I’m years away from selling my business” or “I’ll work on that right when I am ready to sell the business.” Unfortunately, those aren’t appropriate answers.
There are really two types of ‘exits’ from a business. One is the voluntary sale (or transfer) of the business to another owner. This could be to a family member, to a partner, to employees, or to a third party. The other type is the involuntary transfer due to an unforeseen event such as death, illness, disability, divorce, or simply a tanking market, i.e. recession. For this discussion, let’s talk about the voluntary type.
The best definition I have seen for exit strategy is “a systematic process for a business owner to transition his business away on his own terms and maximizing his return.” In other words, putting a plan in place that allows the owner to sell/transfer their business when they are ready and at the best price/terms possible.
As I indicated above, most business owners don’t give exit strategy planning much thought. As a result, those who don’t plan for this transition are often faced with the inability to receive enough money to fund a comfortable retirement. This doesn’t happen because these owners failed to create value in their businesses, rather it’s because they failed to realize how much value they needed to create (and retain). Furthermore, they failed to make the business one that would be easily transferable to another owner. Note: statistics show that only 10-20% of all businesses listed for sale actually do sell.
There are many articles written about exit strategy planning with detailed steps and tactics. But first the business owner needs to ask themselves the following questions:
- What are your retirement goals, i.e. when do you want to exit and how much money will you need?
- How much is your business worth today? Note: have a professional do the valuation, don’t guess.
- What is the difference between the amount you need to sell the business for and how much is it worth today? That is the amount of value you need to increase the business by before selling it.
One last piece of advice, enlist assistance from your advisor team – attorney, accountant, and banker. They probably assisted you with starting your business, and they can be a great help in exiting your business.
In the next 20 years, it’s projected that 2.5 – 3.8 million businesses will be for sale due to the number of baby boomers hitting retirement age. This is unprecedented and will put downward pressure on pricing due to such a high supply. Bottom line – business owners need to plan for their exit even more carefully than ever before.