Over the years, your business has provided a livelihood, produced jobs and built significant value as an asset. But at some point, every Entrepreneur reaches a stage when visions of exiting the business are considered. When these thoughts begin to occur, it is time to begin the process of planning your exit strategy.
There are several ways for Entrepreneurs to accomplish the inevitable business exit:
- Liquidate the business
- Create a succession plan for next family generation
- Sell to key employee(s)
- Sell to existing partner
- Sell to a competitor, supplier or third party
- Partial sale with continuing involvement
- IPO (initial public offering)
When deciding the optimal route to exit your business, there are a number of factors to be considered, but once an exit path has been determined, the next critical steps for preparing your business for the exit are essentially the same, regardless of the path chosen.
The objective of preparing your business for sale is to realize an optimal value for your business upon the exit event. Some Entrepreneurs start preparing for the exit when the business is initially started; in other words, the business was started to eventually sell. Other Entrepreneurs do not think about the exit until the time draws near. Which of these approaches is better? To consider, it’s important to contrast the process of selling the business versus preparing the business for sale. Ideally, the process of selling the business is begun only once the business has been sufficiently prepared for sale. Knowing that the day will come when you desire to exit the business, it’s a good practice to operate your business with a secondary goal of one day selling your business. Private businesses, no matter the size, are by definition an illiquid asset, and therefore, to sell your business at an acceptable value requires not only a business that has a compelling value proposition to the marketplace, but also a business that has gone through the stages of planning and preparing for an ultimate sale.
Deciding to undergo an immediate sale of your business, without having gone through the preparatory steps of positioning your business for an ultimate sale in the future, will result in realizing less than the full value for your business. Assuming that your exit objective is realizing the highest possible price for the sale of your business, exit planning and preparing your business for its ultimate sale is essential.
So what is involved in preparing to sell your business? The process is summarized in the following five Critical Steps for Preparing to Sell Your Business:
Determine your goals in the sale of your business.
Are you willing to stay with the business for a period of time after the sale? Are there family members’ participation to be considered? Will you offer seller financing alternatives? These are just a sample of the many considerations to be made.
Conduct a business assessment highlighting the strengths and opportunities of the business.
Documenting an assessment that details the strengths and weaknesses of the business will identify potential areas for improvement, as well as provide a realistic review for valuation purposes.
Estimate the value of your business and reconcile with your expectations.
Preparation of a business valuation, either professionally or using estimate methods, needs to be done. The result may be consistent with your expectations, but it may reveal that there is considerable work to be done before it’s realistically time to consider selling your business.
Conduct a process to analyze and review the Business Model and Business Plan to identify areas of opportunity to strengthen your business’ value proposition in the marketplace, raise profits and ultimately the value of the business.
Improving your business valuation will require a comprehensive business review, identification of areas for improvement, and initiatives to implement improvements.
Implement a time and action plan to effect changes in the business to impact both the short and long-term performance of the business.
A realistic time and action plan will serve as a tool to guide your work and monitor results toward your goals.
When should you start preparing your business for an eventual exit? The larger the difference between the current realistic value of the business and your expectation, the more time needs to be given to narrow this difference. It’s never too early to go through the Critical Steps as an exercise to determine the status of your business valuation and begin working on ways to improve your business’ value.
Suncoast CFO Solutions provides an affordable solution for smaller businesses operating without the role of a CFO by offering part-time CFO services tailored to the needs of the business. Contact us for a free consultation, or for a nominal fee, an in-depth Business Analysis of your business.