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
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
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.