Why Every Business Owner Needs an Exit Strategy
By Bryan Santos
There was an article I read about a 59-year-old man who had built his steel fabrication business over many years to 38 staff with revenues of over $5 Million a year and he wanted to retire. So he had his financial adviser value his business and the answer he came back with shocked him.
“They valued my business at $0”, he said.
The article goes on to say that the main reason was due to the economic environment and that his business wasn’t set up well enough for an exit that was worthy of a decent sale price. Or any price in this case.
Believe it or not, this happens all the time.
Is your business worth $0 too?
Most business owners work in their businesses to make more money and live off the profits their businesses generate, to give them the lifestyle they’re accustomed to. It helps to pay off their mortgage. It pays to put food on the table. It pays for their kids’ education and all the expenses that pay for their lives. It’s what I refer to as building a “lifestyle business”. Lifestyle business because it provides them a certain lifestyle.
The problem with the gentleman in the article is that he spent his life building a business that paid for his lifestyle, but never built it to be of value to someone when he was ready to retire.
Most of you reading this right now probably haven’t thought about an exit plan.
We’re only just experiencing the beginning of the baby boomers entering their early 70’s. In the next few years we’ll see a whole lot more baby boomer business owners exiting their businesses. So much so that there will be more businesses wanting to exit than there are buyers buying them.
So that means for most of those business owners, they’ll end up having to simply shut shop after years of hard work. Or in many cases they’ll end up selling it at rock bottom prices and on terms that don’t suit them.
What’s even scarier is that many of those baby boomer business owners will be ‘forced’ into an exit earlier than they want due to health, partnership splits, financial difficulty and even death.
“But I’m not a baby boomer” I hear you say.
Well, this is just as important for you even if you’re not a baby boomer.
Most of you reading this will eventually exit your businesses before the end of your working life.
Whether it be because it has taken a physical toll on your body. Whether it is because you are mentally and emotionally exhausted. Or if it’s just that you want to cash out.
Or, touch wood, you may be forced to exit your business earlier to other unforeseen circumstances.
Most business owners won’t be able to exit their business properly because they don’t have an exit plan.
What is an exit exactly?
When I say exit, it can mean any number of things. Selling your business is just one type of exit. You can do a trade sale which is essentially a normal sale to a willing buyer. You can exit by selling to a strategic buyer. That’s where a person or company could be willing to pay more because your business has a strategic advantage to them should they purchase it.
An exit could be passing it on to your children. Or even passing it on to your manager. It could be a management buyout or buy-in. Or for some larger business an exit could be an IPO on the stock exchange or a merger with another company.
An exit can also mean the company continuing under management and you not having to work in it.
An exit is an outcome. It’s an outcome that you would rather be proactive about making happen as opposed to having the outcome decided for you.
Your business is like your home. It is an asset that has value. You want to build that asset value so that you can receive the benefits of that asset’s growth.
Who would you exit to?
Even if you have a small one-person operation and you want to keep it that way, you still ought to plan for an exit.
Even if you don’t want to sell your business in the near future, you should still prepare for an exit.
Remember, situations might force you to exit before you really want to.
So as part of your plans, you want to think about, “Who would want to buy my business?”.
The best buyers are the ones who have a strategic benefit to buying your business.
Picture that you’ve built your business so that it is now running completely under management, meaning that you don’t have to work in the business. You might pop in every now and then. But the business works well whether you’re there or not. Picture that the business is busy and booked out with quality clients who pay premium prices and are loyal fans of your business.
There are systems and procedures that your staff use effortlessly. They run it like their own and clients love them all. Your business is so well run that your business is THE place to go in your area and it is the best business of its kind in your town.
One way of exiting your business, if it’s this well run, might be to franchise your business. Better yet, you may want to sell the rights to franchise your business. People like this might be willing to pay you more because they see that your great business can be replicated over and over again.
Another good buyer might be larger businesses like yours who are in different towns or cities that want to replicate what you have. So by buying your business they get all your systems and procedures to add to their other businesses in the other cities. That’s a strategic buyer who might be willing to pay more because it will add more value to them than the actual profits of that one business.
The key here is to think about, “Who will gain the most advantage from my business if they were to buy it?”
Then build the business up to make it attractive to them.
Optimize the Value of Your Business
Here are some key areas that potential buyers will want to see.
Cash Flow and Profitability
This is the main thing that will usually affect your business value. Maintain good financial records including Profit & Loss Statements, Balance Sheets, Cash Flow Statements, Budgets & Forecasts.
Timing of sale is important too. For example, selling when sales and profits are on an upward trend is more attractive when sales and profits are stagnant or declining.
Good Team and Good Structure
Having a great team is very important to buyers. That’s because they want to know that the business can continue to succeed, even when the owner leaves. The biggest issue when a business owner leaves in a beauty related business is that clients will leave too. If you have a great team and a great structure to support them, you’ll go a long way in improving your value.
Also, a part of this is having great systems and processes making a good structure. Again, it gives the buyer confidence that the business can be run effectively and profitably even if the owner leaves.
Show the Upside
Even if the business has been growing, you want to show that there is still plenty of room for further growth. It may be that there is still a lot of the local area marketplace that has been untapped. It could be that you have a database that they can continue to market to. It could be that you’ve developed joint venture relationships that can continue on with the new owner. It could be that your systems allow it to be scaled and duplicated into other shops.
Where to from here?
Now’s the time to start thinking and talking through with your husband, wife, partner, family and trusted advisors, what you’d like to do with your business.
Discuss when and how you’d like to exit. What would be ideal? What would you do before and after the exit?
Start the conversations and then start planning it out. Having an experienced advisor to help you is also vital in helping you devise an exit plan.
About the Author
Bryan has been working with businesses to grow and improve their sales and profitability since 2001. Having worked with hundreds of businesses owners advising and helping to improve their businesses, Bryan has a breadth of knowledge and deep understanding of business that includes:
- Business and corporate finance
- Cash flow and profitability strategies
- Sales and marketing
- Staffing – recruiting, team culture, management development and personality profiling
- Growth by acquisition
- Exit strategy and planning
Bryan currently works with businesses around Australia and the United States.
Bryan is also involved in capital raising and private equity that sees him involved in advisory and deal making in mergers and acquisitions of companies across multiple industries, in multiple states and countries.
