There has been much focus over the past decade on the tech startup world; how to obtain financing, how to scale and how to make a quick and profitable exit. But what about those business owners who are in it for the long haul? What should they be thinking about over the decades of blood, sweat and tears that they put into building their businesses? Some tips for a successful exit are as follows:
1. Know your number. In order to know when it's time to exit, business owners need to know – from a personal finance perspective – what their number is. How much do they need from the sale of the business in order to live the lifestyle they have become accustomed to, or better yet, the lifestyle they have dreamed about? Sitting down with an experienced financial advisor to get an idea of what that number might be is a good first step in planning to exit. Another step is obtaining a basic business valuation every few years as you approach your time to exit.
2. Create more value. A business owner can take steps well in advance of any sale to reduce risk and increase the value of the business. For example, creating strong processes around sales and marketing, human resources, finance and operations so that the business can run without the owner's day-to-day input makes the business more attractive to a prospective purchaser. Likewise, diversifying customers, suppliers and referral sources so the business is not overly dependent on any portion of these key players will decrease the risk of the business and thereby increase its value. Additionally, hitting key metrics in your numbers based on benchmarks for your industry will increase the sale price. Work with an experienced business coach to understand these metrics and create long term value.
3. Decide how you want to exit. Understanding whether you will be selling your business to the next generation or to the highest bidder is also important. If you'll be selling to a third party, it's best to start organizing the sort of documents and data required by the due diligence process sooner rather than later. Working with a corporate attorney to understand the key categories of documents required and how best to carry out corporate “governance” prior to sale can save significant frustration and delay when it comes time to sell. If instead you'll be passing the business along to your children or key employees, what is your plan for succession? Preparing a business succession plan along with input from a tax advisor, insurance broker and estate planning attorney will ensure that the succession is successful and without unexpected financial consequences.
4. Know thyself. As a long term business owner, the psychological impact of selling “your baby” can be significant. Knowing when you're psychologically ready to take the leap will avoid the unfortunate “deal fail” after months of due diligence and expense because you got cold feet and decided to pull out. It will also lessen the likelihood of seller's remorse should the deal go through. Develop a life plan for what comes after the sale, whether it be investing the proceeds in a new venture or moving to Greece for retirement. Life and business coaches can help guide owners through this process.
Res Nova Law works with clients in the Pacific Northwest and beyond to help them start, scale and sell their closely held businesses. We also connects our clients to our trusted network of CPAs, insurance brokers, trust and estate attorneys, and business and life coaches. Contact us here to learn more.