If you’re a business leader growing your company, planning an exit strategy might feel like putting the cart before the horse. The exit planning process is something that should start years before a potential sale, acquisition, or round of investment. Whether you’re leading a tech behemoth like Amazon or running a small business with growth potential, planning early for the next stage of your company’s evolution is essential for both you and the business.
The exit planning process should be included in your initial business plan. How you exit can have a major influence on guiding your ultimate goals and can give the company a clear direction.
By developing an exit strategy early, you’re not only setting yourself up for an easier transition, but you’re also putting your business in a better position to sell. Any delay due to a lack of planning can mean losing out on an eager buyer or hurting a valuation. Also, a pre-planned exit strategy will look significantly more attractive to a potential business successor.
Prospective buyers want to know that a business they might acquire will lead to a healthy return on investment, and a last-minute exit plan could make these buyers hesitant. In addition to looking desperate, a rushed exit strategy means that there’s little time to plan for a smooth transition. Whoever purchases your business intends to grow the company and possibly even resell it in the future. They’re going to want to see a clear plan in place for building revenue.
Part of developing a successful business exit strategy involves creating a business with a solid sales infrastructure that will grow even after you leave the company. This means building your sales leadership, team, and support staff and developing a robust set of key performance indicators that can help your successor stay on track. These KPIs should include metrics such as revenue growth, revenue per client, client retention rate, and customer acquisition cost.
An exit plan is essential for creating a healthy business that generates long-term success. If you haven’t already begun to create yours, the following checklist can help you plan for a smooth departure on your terms.
How to Determine What Your Company Is Worth
Chances are that you have a good idea of what you want your business to be worth when it goes to sale. The challenge is knowing whether that ideal price tag is something you can get in the real world. The question of how to calculate the value of a business for sale can be a complicated one, involving several variables and moving parts. Still, accurately pricing a business to sell is one of the most important steps to take before planning a successful exit.
There are a few different business valuation methods to choose from, but to give you a better idea of how to price a business for sale, here are the three most common valuation methods businesses use:
- The Asset Method
This straightforward method calculates the difference between your company’s assets and liabilities. It’s typically for businesses where assets outweigh income. The Asset Method can be useful if you’re looking for investors to help revive your business or if you’re trying to sell your company for parts.For profitable businesses still planning to operate after a sale, however, this will only provide a minimum value of your organization rather than a complete picture. For example, in 2018, Google’s net asset value was $175.4 billion; however, the company’s total valuation was $739 billion. - The Income Method
The Income Method determines the present value of your business’s future cash flow. That cash flow forecast is adjusted according to the risk involved in purchasing your company. This strategy is useful if you’re running a startup or a newer business with high growth potential and no profits yet. While it’s not the only determining factor, this method has helped companies like CrowdStrike attract investors while waiting to turn a profit. - The Market Method
Established businesses in an active industry find the Market Method the most useful. It determines a company’s value based on the purchase and sale of comparable companies within the same sector. This is essentially the same method used to determine real estate value. The asking price of a house is primarily calculated by comparing it to the value of similar properties in the area. The Market approach works best when you want to determine an appropriate selling or purchase price based on local competitors.
Don’t be afraid to enlist the help of outside experts, such as investment bankers, business appraisers, and brokers, to make sure you produce the right numbers. They can help go through all your relevant financials and give an estimated value that you can then use to price your business. Ideally, your asking price should be within 10% of this valuation. Once you’ve determined what your company is truly worth, you can then focus on maximizing that selling price.
Maximizing Your Selling Price
When pricing a business to sell, obtaining an accurate valuation is one step of engineering a successful exit while maximizing your selling price and ensures you’re able to get everything your business is worth. However, there are several common issues that can work to lower your asking price, such as:
- Poorly organized financials.
- Low cash flow.
- Revenue streams that are too reliant on one source.
- An over-consolidated customer base.
- Unprotected and easily replicated intellectual property.
- A weak management team.
- Complicated and poorly documented systems and processes.
Just one of these elements can significantly hurt the value of your company and dampen excitement from a potential buyer. Much like when reselling a house, it’s important to do some repair work ahead of time so that everything is in top shape when it’s time to sell.
One of the first areas you should turn to during this process is your financials. Put together formal records that track your finances for the past few years. These records should include numbers such as gross revenue, gains and losses, cash flow, a discretionary earnings statement, and tangible assets minus liabilities. Once your finances are in order, put a standardized practice in place to ensure your financial records will remain in good order through the leadership transition.
By fixing up your finances, you’re in a better position to locate weaknesses that could be a buyer’s red flags. Find ways to diversify your revenue streams and customer base if it looks like you have too many eggs in one financial basket. Make sure there’s enough cash flow for your buyer to invest in the growth of the company. If there’s not, you might need to step back and rectify that first by improving your sales infrastructure or finding new ways to generate revenue.
It’s important to make sure you have a solid management infrastructure in place in addition to your existing revenue. A strong management team instills confidence in a buyer that the business will continue to run smoothly even after you leave. The best way to maximize your sale price when the time comes is to prepare by establishing a business that is organized and operates like a well-oiled machine.
You ensure your asking price is right for buyers with solid financials and strong leadership. However, even if your business is running at maximum efficiency, you still might have some obstacles to overcome before selling.
Dealing With Obstacles That Inhibit Your Sale
The process of selling a business isn’t without its share of roadblocks. When it comes to small and midsized businesses, 50% of sales deals end up falling through. Here are some of the most common obstacles you might encounter that could turn a smooth exit into a bumpy ride:
- Not Getting Your Desired Price
Whether you’re unhappy with your company’s valuation or you can’t find any buyers at your price point, not getting your desired price is a major blow to any exit strategy. How businesses are valued by buyers can vary, especially in the current market, with both current and pre-pandemic financial health having an influence.You might end up stuck for months waiting for a reasonable offer, like a house valued at more than people are willing to pay. You might get far enough along only to have the deal fall through when price negotiations come to a head. While this all can be dispiriting, the truth is that selling a company can take time. Patience and planning can be the key to getting a price that you’re ultimately happy with. - Not Being Able to Sell the Business Outright
If your business exit strategy involves handing the company to someone else and walking away immediately, make sure your business is in the right place to make that happen. Most sales will require you to stay for a smooth transition. Considering less than a quarter of private companies have any criteria for succession planning in place, this shouldn’t come as a surprise.However, if you’re looking for cash upfront and a quick exit, you need to have everything ready for your business successor. Otherwise, you could still be working for months after your planned exit. - Your Business Is Declining
Working to sell a business doesn’t mean neglecting the business itself. Even if your current profits are healthy, a clear downward trend might be enough to scare buyers away. If you do find a willing buyer, you still might pay in the long run if that sale relies on a percentage of future income for its payout.This challenge highlights the importance of developing sales strategies centered around growth and building a sales team that acts on those strategies. Have a documented, repeatable strategy in place that can be easily followed by your team, with or without you present. A potential buyer should know how the sales team operates and what the strategy is behind their process. This gives them confidence that your sales are built on a solid foundation and won’t derail after the new leadership transition. - Excess Inventory
Excess inventory can cost a retail business as much as 32% annually. That’s because this excess leads to more storage and carrying costs, price depreciation, spoilage and expired products, and lower storage availability for newer and best-selling products. Any serious buyer will know to pay attention to inventory levels and price outdated products and excess inventory into their calculations.Make sure you’re cycling out old products and making room for better-selling items. That way, when it’s time to sell, you won’t have to scramble to make your storage rooms presentable. - An Inexperienced Successor
It’s not just your business that can present obstacles; it’s also your business successor. If the next leader lacks the experience to run the company or if they don’t have what it takes to lead it into its next stage, then you will run into some choppy waters upon your exit.Leave the company to someone who can lead it into the future. The new leader shouldn’t be a clone of yourself, but they should have the skills needed to build on what you’ve done. Work on a business continuity plan with your successor to make sure they can weather any potential disruptions that could take place. Then, take some time to show them the daily schedule before they take over officially. - Partnering With the Wrong Broker or Consultant
Partnering with an outside expert to sell your business can be a smart move to get the most value out of the sale and ensure a seamless exit. However, it only works if you partner with the right experts. The wrong broker can potentially tank any chance of a sale by advising you to go with too high of an asking price. The wrong consultant can saddle you with an expensive fee and little or nothing to show for it.Take your time browsing brokers and consultants and make sure to vet them, verifying their claims of expertise. Remember, if a broker gives you a valuation that sounds too good to be true, it probably is.
Planning an exit strategy can be a long and complex process. Selling a company can be even more so. If you need more guidance on how to develop an exit strategy that works for you, check out our advisor map on our website to find one nearest you. You can also shoot us a message and we’ll help find one for you.
