The Sign Businesses For Sale Blog
Do You Have an Exit Plan?
“Exit strategies may allow you to get out before the bottom falls out of your industry. Well-planned exits allow you to get a better price for your business.”
From: Selling Your Business by Russ Robb, published by Adams Media Corporation
Whether you plan to sell out in one year, five years, or never, you need an exit strategy. As the term suggests, an exit strategy is a plan for leaving your business, and every business should have one, if not two. The first is useful as a guide to a smooth exit from your business. The second is for emergencies that could come about due to poor health or partnership problems. You may never plan to sell, but you never know!
The first step in creating an exit plan is to develop what is basically an exit policy and procedure manual. It may end up being only on a few sheets of paper, but it should outline your thoughts on how to exit the business when the time comes. There are some important questions to wrestle with in creating a basic plan and procedures.
The plan should start with outlining the circumstances under which a sale or merger might occur, other than the obvious financial difficulties or other economic pressures. The reason for selling or merging might then be the obvious one – retirement – or another non-emergency situation. Competition issues might be a reason – or perhaps there is a merger under consideration to grow the company. No matter what the circumstance, an exit plan or procedure is something that should be developed even if a reason is not immediately on the horizon.
Next, any existing agreements with other partners or shareholders that could influence any exit plans should be reviewed. If there are partners or shareholders, there should be buy-sell agreements in place. If not, these should be prepared. Any subsequent acquisition of the company will most likely be for the entire business. Everyone involved in the decision to sell, legally or otherwise, should be involved in the exit procedures. This group can then determine under what circumstances the company might be offered for sale.
The next step to consider is which, if any, of the partners, shareholders or key managers will play an actual part in any exit strategy and who will handle what. A legal advisor can be called upon to answer any of the legal issues, and the company’s financial officer or outside accounting firm can develop and resolve any financial issues. Obviously, no one can predict the future, but basic legal and accounting “what-ifs” can be anticipated and answered in advance.
A similar issue to consider is who will be responsible for representing the company in negotiations. It is generally best if one key manager or owner represents the company in the sale process and is accountable for the execution of the procedures in place in the exit plan. This might also be a good time to talk to an M&A intermediary firm for advice about the process itself. Your M&A advisor can provide samples of the documents that will most likely be executed as part of the sale process; e.g., confidentiality agreements, term sheets, letters of intent, and typical closing documents. The M&A advisor can also answer questions relating to fees and charges.
One of the most important tasks is determining how to value the company. Certainly, an appraisal done today will not reflect the value of the company in the future. However, a plan of how the company will be valued for sale purposes should be outlined. For example, tax implications can be considered: Who should do the valuation? Are any synergistic benefits outlined that might impact the value? How would a potential buyer look at the value of the company?
An integral part of the plan is to address the due diligence issues that will be a critical part of any sale. The time to address the due diligence process and possible contentious issues is before a sale plan is formalized. The best way to address the potential “skeletons in the closet” is to shake them at this point and resolve the problems. What are the key problems or issues that could cause concern to a potential acquirer? Are agreements with large customers and suppliers in writing? Are there contracts with key employees? Are the leases, if any, on equipment and real estate current and long enough to meet an acquirer’s requirements?
The time to address selling the company is now. Creating the basic procedures that will be followed makes good business sense and, although they may not be put into action for a long time, they should be in place and updated periodically.
Rating Today’s Business Buyers
Once the decision to sell has been made, the business owner should be aware of the variety of possible business buyers. Just as small business itself has become more sophisticated, the people interested in buying them have also become more divergent and complex. The following are some of today’s most active categories of business buyers:
Family Members
Members of the seller’s own family form a traditional category of business buyer: tried but not always “true.” The notion of a family member taking over is amenable to many of the parties involved because they envision continuity, seeing that as a prime advantage. And it can be, given that the family member treats the role as something akin to a hierarchical responsibility. This can mean years of planning and diligent preparation, involving all or many members of the family in deciding who will be the “heir to the throne.” If this has been done, the family member may be the best type of buyer.
Too often, however, the difficulty with the family buyer category lies in the conflicts that may develop. For example, does the family member have sufficient cash to purchase the business? Can the selling family member really leave the business? In too many cases, these and other conflicts result in serious disruption to the business or to the sales transaction. The result, too often, is an “I-told-you-so” situation, where there are too many opinions, but no one is really ever the wiser. An outside buyer eliminates these often insoluble problems.
The key to deciding on a family member as a buyer is threefold: ability, family agreement, and financial worthiness.
Business Competitors
This is a category often overlooked as a source of prospective purchasers. The obvious concern is that competitors will take advantage of the knowledge that the business is for sale by attempting to lure away customers or clients. However, if the business is compatible, a competitor may be willing to “pay the price” to acquire a ready-made means to expand. A business brokerage professional can be of tremendous assistance in dealing with the competitor. They will use confidentiality agreements and will reveal the name of the business only after contacting the seller and qualifying the competitor.
The Foreign Buyer
Many foreigners arrive in the United States with ample funds and a great desire to share in the American Dream. Many also have difficulty obtaining jobs in their previous professions, because of language barriers, licensing, and specific experience. As owners of their own businesses, at least some of these problems can be short-circuited.
These buyers work hard and long and usually are very successful small business owners. However, their business acumen does not necessarily coincide with that of the seller (as would be the case with any inexperienced owner). Again, a business broker professional knows best how to approach these potential problems.
Important to note is that many small business owners think that foreign companies and independent buyers are willing to pay top dollar for the business. In fact, foreign companies are usually interested only in businesses or companies with sales in the millions.
Synergistic Buyers
These are buyers who feel that a particular business would compliment theirs and that combining the two would result in lower costs, new customers, and other advantages. Synergistic buyers are more likely to pay more than other types of buyers, because they can see the results of the purchase. Again, as with the foreign buyer, synergistic buyers seldom look at the small business, but they may find many mid-sized companies that meet their requirements.
Financial Buyers
This category of buyer comes with perhaps the longest list of criteria–and demands. These buyers want maximum leverage, but they also are the right category for the seller who wants to continue to manage his company after it is sold. Most financial buyers offer a lower purchase price than other types, but they do often make provision for what may be important to the seller other than the money–such as selection of key employees, location, and other issues.
For a business to be of interest to a financial buyer, the profits must be sufficient not only to support existing management, but also to provide a return to the owner.
Individual Buyer
When it comes time to sell, most owners of the small to mid-sized business gravitate toward this buyer. Many of these buyers are mature (aged 40 to 60) and have been well-seasoned in the corporate marketplace. Owning a business is a dream, and one many of them can well afford. The key to approaching this kind of buyer is to find out what it is they are really looking for.
The buyer who needs to replace a job is can be an excellent prospect. Although owning a business is more than a job, and the risks involved can frighten this kind of buyer, they do have the “hunger”–and the need. A further advantage is that this category of buyer comes with fewer “strings” and complications than many of the other types.
A Final Note
Sorting out the “right” buyer is best left to the professionals who have the experience necessary to decide who are the best prospects.
Why Sell Your Company?
Selling one’s business can be a traumatic and emotional event. In fact, “seller’s remorse” is one of the major reasons that deals don’t close. The business may have been in the family for generations. The owner may have built it from scratch or bought it and made it very successful. However, there are times when selling is the best course to take. Here are a few of them.
- Burnout – This is a major reason, according to industry experts, why owners consider selling their business. The long hours and 7-day workweeks can take their toll. In other cases, the business may just become boring – the challenge gone. Losing interest in one’s business usually indicates that it is time to sell.
- No one to take over – Sons and daughters can be disenchanted with the family business by the time it’s their turn to take over. Family members often wish to move on to their own lives and careers.
- Personal problems – Events such as illness, divorce, and partnership issues do occur and many times force the sale of a company. Unfortunately, one cannot predict such events, and too many times, a forced sale does not bring maximum value. Proper planning and documentation can preclude an emergency sale.
- Cashing-out – Many company owners have much of their personal net worth invested in their business. This can present a lack of liquidity. Other than borrowing against the assets of the business, an owner’s only option is to sell it. They have spent years building, and now it’s time to cash-in.
- Outside pressure – Successful businesses create competition. It may be building to the point where it is easier to join it, than to fight it. A business may be standing still, while larger companies are moving in.
- An offer from “out of the blue” – The business may not even be on the market, but someone or some other company may see an opportunity. An owner answers the telephone and the voice on the other end says, “We would like to buy your company.”
There are obviously many other reasons why businesses are sold. The paramount issue is that they should not be placed on the market if the owner or principals are not convinced it’s time. And consider an old law that says, “The time to prepare to sell is the day you start or take over the business.”