Whether you’re preparing to sell your business in the next five years or fifty, business exit planning is critical.
The truth is, many owners and entrepreneurs are woefully unprepared and they end up paying for it in their business valuation. Working through your exit plan proactively can save you a lot of headache and heartache down the road.
The good news is there are a number of things you can do to make your business attractive to buyers and ensure you earn a substantial profit.
In this post, my goal is to help you get there – we’ll walk through 16 ways to prepare your business for sale.
Importance of Exit Strategy
Remember that no matter what, you won’t own your business forever. Business exit strategies may not be the most exciting topic, but at some point you will be exiting your business – whether it be through sale, retirement, or death.
Most business owners and entrepreneurs never take the time to think through exit strategies, which is one contributing reason around why 90% of businesses never sell.
Positioning Your Business For Sale
Whether it’s months or years away, now is the best time to start preparing to get “exit ready.” A well thought out business exit strategy will help you maximize your return on investment, minimize taxes, and ensure that your legacy continues long after you’re gone.
You can’t just “flip a switch” when it comes to exit strategy planning. Preparing for a sale takes months, if not years of preparation if you want to get a fair value for your business.
You need to take the time to analyze your business’ strengths and weaknesses, create a business plan for growth, and establish systems to ensure the long-term success of your company.
A business exit strategy helps business owners focus on maximizing value, identifies potential pitfalls early on which can allow time to address them before they become major issues.
When Should a Business Owner Start Preparing an Exit Strategy?
An effective exit strategy should begin at least two or three years in advance of when you’d like to sell.
The further in advance you can get ready, the better of you are. Going through this process now will allow you to exit more quickly (likely at a higher price with less headaches) when you decide the time is right.
Even if you have no interest to sell in the near future and haven’t engaged M&A advisors yet, I highly recommend building a sellable company. Many entrepreneurs and company owners never get to this point, and I don’t want you to be one of them.
Although it can be time consuming, this will serve you well and ultimately help you reach your financial goals.
Types of Exit Strategies
While there are multiple exit strategies available, the best exit strategy will depend on the specific circumstances of the business and its owners.
Generally speaking, there are five common types of exit strategies:
1. Internal Transfer
In this strategy, business ownership is transferred to another family member or a trusted employee. This type of exit has the advantage of maintaining continuity within small businesses and can be beneficial if the buyer has existing knowledge of the business. Many like the idea of transitioning to a family member for legacy reasons.
2. Sale or Merger
The sale or merger option involves transferring ownership to an outside party who may either take over the entire company or merge it with their own larger company. During this process, negotiations will need to take place in order to determine how much value each side will receive from the deal.
This can be an attractive option for small business owners looking to get a clean break and quickly liquidate their equity in the company.
3. Initial Public Offering (IPO)
Initial Public Offerings occur when a private company sells shares of its stock to public investors on a securities exchange like the New York Stock Exchange (NYSE).
This type of exit strategy can be beneficial for larger companies that are looking to raise capital and reach a larger customer base.
4. Liquidation
In some cases, a business owner may choose to liquidate their company’s assets to limit losses.
The choice to sell assets is often made when a business would otherwise be worth very little in a sale or merger. It could be a business owner is going through bankruptcy or other financial hardship (assets seized, challenges to borrow credit, etc.)
5. Management Buyout
A management buyout (or employee buyout) occurs when a group of existing managers purchase a majority of the shares in the organization with funding from outside sources such as banks or venture capitalists.
Management buyouts can be attractive to business owners that want to remain in the company but do not have the necessary capital to purchase it outright.
How to Prepare an Exit Strategy
Now that you know what types of exit strategies are available, it’s worth considering how best to prepare your business for sale.
While there is a lot we can’t control (significant changes to market conditions etc.), there is a lot we can do to influence a successful transition and fair price.
1. Reassess Business Structure
Have your attorney review your business entity and all related documentation. Getting your business structure in order facilitate an exit will save you a lot of headaches later on.
Think about building your business structure to isolate and protect against liability. One way to do this is to set up separate entities for your profit centers, tangible assets, and intangible assets (IP). This way, if one part of your business experiences a significant liability, the other parts will remain unscathed.
2. Focus on Value Drivers
Prior to selling your business, it is important to focus on value drivers such as customer retention, operational efficiency, your competitive advantage, and product/service innovation.
If you’d like to go deeper, I’d recommend checking out my post on value drivers. This will give you a good understanding into some of the key levers that can move the needle on your exit price.
3. Settle Any Existing Lawsuits and Claims
Make sure that all outstanding legal matters are settled far in advance of any negotiations to sell your business.
If you have anyone filing lawsuits against you before you sell, your sales price could be significantly reduced. A buyer will estimate the potential damages of that lawsuit and take this off the valuation.
4. Ensure You Are Not Critical in Day to Day Operations
When your business can run entirely without you, you have a valuable asset.
One of the biggest mistakes business owners make is to design a business that relies too heavily on them.
Here’s a test: you should be able to leave for six months (with no communication) and have business run as usual. Nothing can be dependent on you.
If you can’t do this, you will not only take a major hit on your sales price, but likely be forced to remain involved after you sell to ensure a smooth transition.
5. Simplify Your Cap Table
If you’re not the sole business owner, you’ll want to think about your cap table. The more complicated your capitalization table, the more potential issues can arise when looking to sell your company and exit.
I’d recommend trying to buy out partners and private investors prior to selling if at all possible. Having partners leads to more complex decision making and negotiation, which can make things more complicated and be a deterrent to potential buyers.
6. Start Thinking About Potential Buyers
I’ve created a detailed post to help guide you through this process.
I recommend putting together a list of at least three to five potential buyers and think through the reasons why they should acquire you. Many buyers in the same industry will be targeting a strategic acquisition, so think about they will benefit if their company buys you (entering a new market, acquiring valuable IP, products etc.)?
How do you want to position your business to these potential buyers? Start cultivating these relationships early, as they can plant the seed for a future offer.
7. Get Your Company’s Financials Audited
Your financial statements are the foundation that your business valuation is built on, so it’s important to get them right. This means having a complete and accurate picture of your revenue, expenses, assets, and liabilities. Buyers will typically be very interested in the last 12-24 months of financial data.
You should also make sure your financial statements (balance sheet, income statement, and cashflow statement) are audited by an independent third-party auditor to provide more credibility to potential buyers.
8. Ensure Intellectual Property (IP) is Registered
Often times, businesses have developed unique patents, trademarks and copyrights that are vital to their operations.
Make sure these are registered to help protect them in the event of a sale. When you register the IP, you get additional statutory rights that can be enforced in court in the event of any infringement.
This will also make you more attractive to buyers who want certainty that they won’t be infringing on any existing IP rights when buying your business. This also gives you more leverage when negotiating purchase price and other terms.
9. Reliable and Consistent KPIs
If you don’t already have well-established KPIs, take the time to create and track core metrics for the following:
- How do you drive traffic?
- How do you attract leads and build your prospect list?
- Do you have a repeatable way to acquire customers?
- What is your conversion mechanism for all revenue streams?
- How do you ensure customers are happy?
- What is your systematic referral engine?
- How do you sell customers after the initial sale?
You should be able to show consistent, detailed metrics for each category, which will create confidence that your success is predictable and will continue after the sale.
If you can do this, you’ll be able to earn much more with the sale.
10. Retention and Succession Planning (Management Team/Skilled Employees)
A succession plan ensures that there is a continuous pipeline of talent available to take over after you leave the company.
Buyers will want to see your current management team (and key employees) secured to continue to grow the business. Do all you can to prevent your skilled employees from leaving in the two years prior to your exit. Getting your high performers committed to staying onboard will go a long way.
Think about paying your top people above market and offering them a long-term incentive plan that rewards their performance and loyalty.
11. Maximize Profits
The valuation of your company is based on your profits, so now is the time to make sure you’re driving up profits as much as possible.
In the 2-3 years leading up to an exit, you want to to optimize for higher profits to help increase your valuation.
A handful of things to keep in mind:
- If you are going to spend money, invest in profit making assets (i.e. increasing ad spend)
- Stop reducing your profits to save on taxes (prioritize profits over maximizing deductions)
- Stop paying down debt any faster than you need to. Invest in profits instead.
- Don’t pay personal expenses from the business
- Cut any non-critical expenses
12. Thorough Documentation and Standard Operating Procedures
As a business owner, you want to make sure your company is running as efficiently and effectively as possible. This means having detailed documentation of all processes and procedures so that anyone can pick up where you left off.
Aim to have your team capture every task they do consistently (exactly what to do at every step).
You want to have extreme detail into how every workflow happens to eliminate any sort of key person dependency risk.
13. Reduce Customer Concentration Issues
The more diversified your customer base is, the less risk there is for the buyer. In advance of an exit, it’s worth putting tremendous focus on retaining your top customers. If a buyer thinks any are at risk of leaving, it can quickly lead to a reduction in sales price.
If a single large client makes up a significant portion of your revenue, if they were to leave it would have a catastrophic impact on the business.
A simple rule of thumb: ensure no one client makes up more than 15% of your revenue.
You want to show that you have lots of happy customers, and that no single customer is too important.
14. Eliminate Single Channel Dependence
If you currently only rely on one marketing channel to acquire customers, this is a potential deal killer and something that will be flagged during due diligence.
The most dangerous number in any business is one, which is something most businesses owners are susceptible to. If this single marketing channel stops working, it be catastrophic.
As an example, if 95% of your revenue is generated from Google Ads, this is something you want to address immediately.
15. Develop a Compelling Growth Story
Think about creating a strong growth story around what the future upside opportunities are after the sale. Put together a multi-year scaling plan that paints a picture of the future.
- What headroom is available?
- What is the untapped total addressable market?
- Is is realistic to reach these business goals?
- What sales channels or growth strategies haven’t been tapped into yet?
Your buyer isn’t buying your business for what it is today, they are buying it for what it could be in the future. You want to be able to articulate business goals for how you could potentially 10X the business.
The more believable your story and business plan is, the more valuable your business will become.
16. Don’t Tell Anyone You Are Selling
Lastly, make sure you keep the sale of your business confidential. Don’t announce that you are selling until a deal is done and all parties have signed off on it.
Don’t tell any employee, family member, or close friend unless you absolutely need to. You don’t want rumors of a potential sale impacting customer relationships and employee morale.
Your Business Exit Strategy
By following these tips and getting your exit plan ready, you’ll be in a much better position to get the most out of a potential sale.
Your sale price is likely going to depend on how well you’ve prepared your business for an exit, and having a clear planning process in place will give you the best chances of getting top dollar when it comes time to sell.
If you prepare early to be well-positioned for a sale, your company helps set you up for a substantial profit and successful future. Good luck!
