Selling your business? Developing a successful exit strategy, part 2

Selling your business?

Developing a successful exit strategy, part 2

by Peter Thelen Sr., CPA, FMC, President of Thelen Financial

Marcel Kessler on Pixabay

Which exit strategy is best for you?

The following scenarios outline the key considerations for each type of potential buyer and the resulting outcome you may be looking for.

If you’re ready to retire and desire to leave a legacy:

If you’re looking to retire and have no one to take over the business, then you’ll likely want to sell to a strategic buyer. You’ll probably want to sell the majority of your ownership, if not all of it, and have little to no involvement in the business post-sale. If you do want to stay involved, you will limit yourself to finding buyers who are willing or able to offer you the position that fits your needs post-close. If you want to cash out, but keep working: If you’re looking for a large pay-out, then selling to a financial buyer may be the best option. These buyers are typically willing to pay a premium for businesses that fit their acquisition criteria. You’ll either sell 100% of your shares or retain a stake in the business, depending on how much cash you’re looking to get and what the buyer’s preferences are. If you end up selling to a private equity firm, they will likely require you to stay on for a transition period to ensure a successful integration. If you want to keep the business in the family: If you have a family member or employee who is interested in taking over the business, then passing the business on through a succession plan may be the best option.

This can help you ensure that the business remains in the family, or that a key employee is rewarded for their dedication to the company. In this case, you’ll likely sell only a small portion of your stake at first and have some level of involvement in the business post-sale, whether it’s serving on the board or consulting in specific areas of the business. Outright sales are not the only way to accomplish this type of transition. You could develop an Employee Stock Ownership Plan (ESOP), for example.

In part 1 of this series, we explained exactly what a business exit strategy is and we outlined why it’s important to identify your reasons for wanting to sell your business.

Your reason for selling should help inform your decision on what kind of buyer you want to attract. It is also important to consider what your ideal future might look like after you sell your business. This will ensure that you have a clear vision for the future as you devise and implement your exit strategy.

If you need to free up time: If you have another business idea that you want to pursue, or if you’re just ready for a change, some form of internal succession plan would be ideal. This involves building a leadership team, and typically setting up some form of equity incentive program as well as setting up an oversight body like a board of directors. In this case you’ll likely sell off your stake over time and have a diminishing level of involvement in the business. If you’re moving on: If you’re no longer passionate about the industry your business is in, or if you’re ready to let go of your business entirely, either a strategic or financial buyer could be the best option.

Timing is key here because you are typically looking for the highest bidder and if you wait too long to sell, buyers may be less interested in your business as it will no longer be strategically important or complementary to their business. In this case, it is still vitally important to have systems and processes in place that are understandable to the buyers and can be successfully and efficiently integrated into the acquiring company.

If the business is not performing and you need to be

liquid: If the business is not performing well and you need to be liquid, it may be best to simply sell off the assets, both physical assets and any customer contracts or data lists. In a business liquidation, you may sell different parts of the business to different buyers or find one buyer who is willing to purchase all the assets. In any case, your company name and employees may or may not be retained by the acquiring parties.

Mastering the numbers game:

Post-sale revenue and margin projections

You started your business out by crunching the numbers, backing into your sales, required margins, etc. When it comes time to sell it, numbers are even more important. When preparing your Confidential Information Memorandum (CIM) it’s important to have a realistic view of what the business is worth. This means having a clear understanding of the revenue, margins and market conditions that exist today and what you can expect postsale. It’s also important to remember that buyers will likely want to see proof of your revenue and margin projections. In most sales you will also have an earn-out component or at least a working capital true-up period. To get through these situations as painlessly as possible, you will need to make sure your numbers are good. Buyers will want to see financial statements, tax returns, and other documentation that supports your claims. Prior to going to market, it is important to get an outside evaluation of your accounting data and processes to prepare for things like the quality of earnings due diligence as well as ensuring that your delivered working capital numbers are accurate. The following are some important things to keep in mind when projecting your post-sale revenue and margins:

1.

Make sure your projections are realistic.

If your projections are too optimistic, buyers will be skeptical and may be less likely to make an offer. On the other hand, you don’t want to leave money on the table. You want to be confident in your numbers and the financial projections. If you hire a professional to prepare the projections, spend the time to dig deep into them and understand the methodology used to create the projections and all relevant assumptions used.

Your source for locally grown groundcovers and perennials...

Located just outside the perimeter and convenient toto HwHwy. 78

Visit us today!

1327 Rock Mountain Blvd. Stone Mountain, GA 30083 770.454.7994 JR Cell: 770.352.4407

2.

Use conservative assumptions.

When in doubt, it’s always better to use conservative assumptions in your projections. This will make it more likely that your projections will be met or exceeded post-sale.

3.

Have a plan for how you’ll achieve your projections.

Buyers will want to see that you have a clear plan for how you’ll achieve your post-sale revenue and margin projections. This means having a clear understanding of your target market, your marketing strategy, and your sales process.

4.

Use historical data to inform your projections.

It seems like it would go without saying, but make sure you have historical data on revenue and margins to support your projections. This data can be a valuable guide in determining what you can realistically expect post-sale.

Have realistic expectations.

Remember that buyers are typically looking for businesses that they can grow and scale. This means that they’re typically not interested in businesses that are already at their peak. As such, it’s important to have realistic expectations about what your business is worth. In addition to getting a market valuation for your business from a professional, you also need to determine what the business is worth to you. This is what’s known as your “personal valuation.” Your personal valuation should take the following into account:

The value of your invested time.

The value of your experience.

The value of your current lifestyle.

The value of your future lifestyle. When valuing your business, it’s important to consider your future plans. This includes your retirement plans, your plans for starting a new business, and your plans for building your legacy. How much do you need to sell your business for in order to achieve these plans? If you’re retiring, you’ll want to ensure that you have enough money to support yourself throughout retirement. If you’re starting a new venture, you’ll need to have the capital required as well as a nest egg to fall back on if things don’t go as planned. Depending on your plans post-close, you may need to spend time with a financial advisor, setting up trusts or other vehicles to accomplish your goals, or if you’re starting a new business, spend time with your business advisor developing your plans for post-close activities and cashflow needs. Typically, when your personal valuation is in line with the market value, it’s a good indication that you’re ready to sell. If your personal valuation is significantly higher than the market value, it may be an indication that it’s time to engage a business advisor to help develop a valuebuilding program to reach your numbers.

5. 4 4 4 4

Our final thoughts on part 2 of

Formulating an Exit Strategy

Having a clear idea of which exit strategy you are going to implement allows you to plot actionable steps towards getting your business ready for sale and identifying the correct buyers. Once you have a thorough understanding of the value of your business, you can begin to think about the transition process and what needs to happen for the sale to be successful, which we’ll unpack in the third part of this series. Part 3 of Formulating an Exit Strategy will cover all of the steps you need to take to ensure a seamless transition for you, your family, and your employees. We’ll also tell you how to make sure that the strategy you implement today will see you achieving financial freedom as you move on to your next adventure.

About the author

Peter Thelen is Founder of Thelen Financial, A Georgia Urban Ag Council member. Thelen Financial is a fullservice CPA Firm connecting real-world landscape business experience with tax planning and compliance, risk management, acquisition of capital and strategic consulting.

Thelen Financial, Inc. 107 W. Courthouse Sq. Ste 111 | Cumming GA 30040 770-527-6574 | pthelen@thelenfinancial.com

If you’re interested in selling your business or want to gain insight into the succession plan process, contact Thelen Financial today to schedule a consultation. We’ll assess your situation and help you determine the best course of action for your unique needs, giving you expert advice on how to formulate and implement a successful exit strategy so you can take actionable steps to financial freedom.