Exit strategy summary

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Summary of strategies to implement prior to selling your business

Summary of strategies to implement prior to selling your business

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  • 1. PLANNING YOUR EXIT STRATEGY You have worked hard for several years building your business and you know that you will want to sell it sometime in the near future. An exit strategy is a road map to selling a privately held business. It is a strategic plan to make your business more attractive to a buyer. It can maximize the potential sales price and allow you to meet your future needs. Below are 7 key tips in planning an exit strategy. Remember, when planning an exit strategy, view it from a buyer’s perspective. 1. Set a timeline It is important to build a selling timeline so that you can provide the time that is necessary for the preparation and packaging cycle. It can take in excess of one year from the time of listing for a business sale to close. When is the best time to sell? - When you have growing revenues and peak profit performance, yet untapped growth potential is still evident? 2. Prepare your financial statements in advance of sale. Most small business owners “live” out of their business – perhaps better known as “creative accounting”. They maximize expenses in order to minimize profits therefore minimizing taxes. However, buyers buy based on profitability, and most business transactions occur based on a multiple of earnings. While “recasting” the Profit & Loss statement is a common means of adding back “discretionary expenses” to show a truer reflection of the income generated by the business, the “cleaner” the books are the easier it will be to attain a higher price for the business. It may well be worth paying taxes on higher income for a couple of years prior to selling the business rather than practicing “creative accounting”. Example – Assume you increase net income by $50K/year for two years by not loading up the expenses that will be questionable for a buyer to consider as true “income” generated by the business. At a higher tax rate, this may save up to $33K in taxes over the two year period ($100k x 33%tax rate). However, when selling the business, if that additional $50K in annual income is given full credit by the buyer, it will likely increase your sales price by 2.5 times that amount – the equivalent of $125K ($50K x 2.5 = $125K). And, taxes will likely be based on capital gains rate (currently 15%), meaning the tax hit on the $125K would be only $18,750. The net effect – $106,250 in gain on the sale versus a savings of $33K in taxes for the two years prior. This doesn’t even take in to consideration the requirements a banker will have for “clean” financials when considering the terms of a business loan. Jeff Goldblatt – Business Intermediary 321 North Central Expressway – Suite 350 McKinney, TX 75070 Tel: 214-733-8282, ext. 26 jeffg@vrmckinney.com
  • 2. 3. Educate yourself on business valuation trends Business owners often mistakenly think their business is worth a certain value based on a variety of factors: a. Something as simple as “gut feel”, b. An amount someone may have mentioned to them during a cocktail conversation c. Equating the value of their business to the rumored amount that a competitor received for their business – without any knowledge of the intimate details of the competitor’s business performance. Don’t be under the illusion that your business is worth a certain amount without validating that number through standard business valuation methods. Talk to a business broker or business valuation expert on a periodic basis to ensure you are staying abreast of the market changes and dynamics. 4. Understand tax ramifications You may have planned your exit well – the timing is right, your financial statements are in good order, profits are at peak level, and you have received an acceptable valuation. However, do you know how much you will actually receive after taxes? Visit with your accountant and make sure that you understand the tax implications of a sale. Financing arrangements should be considered as is may be in your best interest to provide seller financing in order to defer some taxes. Providing some seller financing typically allows for a higher sale price to be attained. 5. Build a diversified customer base Regardless of the type of business you have, relying too heavily on one client is risky. This will scare buyers. They need to see a diversified customer base with no one client making up more than 10 – 15% of the total sales volume. 6. Build a management team Even if your company is a small business of less than 10 employees, it is important that the business doesn’t solely rely on you. A buyer does not want to feel vulnerable at the time of investment. Develop a team that share responsibility for the business – make yourself as dispensable as possible! 7. Reinvestment in equipment and facility Selling a business is similar to selling a home – looks are important. Regardless of the type of business that is for sale, it is important for the space to be clean, organized, and having the latest equipment necessary to operate the business. This shows that the buyer will not have immediate additional business investment upon assuming ownership.