15 important considerations when planning an exit
Preparing your business for sale? Here are 15 important considerations when planning an exit
We hear a lot about the importance of planning when starting a small business, but not enough about planning to exit.
Managing a small business requires a lot more effort - and also risk - than simply working for someone else, so it’s important to ensure that you are building an asset in your business. Let’s face it: unless your hard work is building equity in your business that will be saleable, then you are simply creating a job and monthly income for yourself. Many business owners don’t foresee that they might want to sell their business, yet life circumstances change and ultimately every business owner will require a succession plan. A planned exit strategy will allow you to get the best return on your investment when you decide to sell your business.
With this in mind here are 15 important considerations:
1. Be clear on your reasons for selling
The first step in preparing to exit your small business is to be clear on the reasons why you want to sell it. Not only will this be a key question that a potential purchaser will ask you, but it may also identify areas that need addressing prior to the sale of the business.
When a prospective buyer asks why you are selling, your reasons need to be convincing and remember that consistent, genuine answers will inspire the most confidence.
2. Clean up problem areas
Don’t try to sell a problem, but rather clean up any problem areas so that they can’t be used against you to reduce your selling price. Just as you spring-clean a home before putting it on the market, your business needs to be polished up to its most presentable before it is made “open for inspection”.
A business that demonstrates consistent profitability is going to earn a better price. This means that the practices that reduce tax liability will also minimise the value of a business. It is therefore important to plan years in advance of the actual sale so that you have the opportunity to put your business in the best financial light.
3. Is it the right time to sell?
The financial performance and history of the company in question is often the most important factor in determining price at the time of sale. A business owner who chooses to sell after posting several years of steady growth will naturally command a higher price than a business owner who decides to sell only a year or two into that growth trend.
If your business operates in an industry that’s experiencing a downturn, consider delaying the sale if possible. It is usually wise to ride out the trough and put the company up for sale after the industry enters a more robust cycle.
4. Estimating the value
There are a number of methods for valuing a business, including valuing the goodwill component. To realistically value a business you need a good understanding of the marketplace.
Over a period of time an industry usually develops its own rules of thumb by which a business is to be valued. There are also formulas that can be used to arrive at the approximate value of a business. One of the most important factors to consider when calculating the value of a business is its future earning profitability.
Over time, you might also like to watch advertisements for businesses for sale that are similar to yours will give you a firm idea of price ranges in your industry.
5. Brand and goodwill
Review your business’s branding and perception in the marketplace. What can you do to ensure that the goodwill is apparent to a potential purchaser and how can this goodwill be retained without you in the business?
Engage a good marketing or brand consultant to develop a consistent brand image and message across all of your corporate literature. A state of the art website and brochure will assist a potential purchaser to gain a tangible experience of your brand.
6. Review your sales and marketing
If you haven’t already, now is the time to systemise your sales and marketing so that a new purchaser can see that there will be a continued flow of business. A well thought‑out marketing plan will give a new owner confidence.
Having clear systems and processes that are documented in an Operations Manual, is an important step in selling your business.
You want the business to be able to run without your daily input so all the knowledge that you may have in your head needs to be documented.
8. Your future
Decide if you want to stay on and work in the business. In some personal service businesses, to have the old proprietor stay on to hand over relationships is beneficial.
The transition from being fully engrossed in your small business to being out of it altogether may be greater than you first imagine. A transition plan whereby you continue in a consultancy or advisory role may suit both you and the new purchaser.
What is the position of your staff – will they stay on with the new owner? It is important to talk to staff in advance.
The best outcome is to have motivated staff who are incentivised to achieve for the new owner. This will lock in the human capital and add to the value of your business.
Are your records up to a good standard to enable you to present information to a purchaser? The free flow of information to a purchaser will inspire confidence in your business.
Ensure that the information presented to a potential purchaser is accurate and truthful. Remember that before giving confidential information about your business, you can ask potential purchasers to sign a Non-Disclosure Agreement.
Information that needs to be covered should include the following:
• The history of your business
• A manual on business operations
• Discussion of both clients and suppliers and related agreements
• Your marketing plan
• Description of your industry and competition
• Human Resources and any staffing issues
• Insurance coverage for business
• Identification of legal issues and / or liabilities
• Financial statements for the past three to five years.
11. Speak to your accountant
Your accountant will be key to structuring a sale successfully. Talk to them about the estimated value of your business, as well as on tax issues. Will you be eligible for the small business tax concession? How can the timing of the sale benefit you from a tax point of view? Getting the tax structure right can save you thousands of dollars in tax – it is possible to sell a business for up to $2 million profit and pay no capital gains tax!
It is also crucial that a qualified accountant (CA or CPA) prepares your profit and loss statements and prospectus. This ensures accuracy and demonstrates the market value of the business to potential purchasers.
Decide if you want to lend any funds to the purchaser to enable the sale of the business. Your accountant can help you structure the terms of the purchase and advise on different ways to structure the sale such as earn outs or instalment sales.
13. Legal documentation
Speak to your lawyer to ensure that the business sale agreement is structured effectively and that you are protected in the future. Selling a business involves complex variables and a standard contract may not be comprehensive enough.
For example, you need to be very specific about what is being sold. Selling a business differs from selling the shares of a company. If you have a company structure, buyers will be mainly interested in your business assets and operations, not the company itself. You will need to clearly itemise the assets owned by the business that will form part of the sale. Selling a company does not mean just selling the business but also the debts and liabilities and therefore less desirable. If you do sell the company shares, ensure you have removed all personal guarantees to suppliers, landlords etc.
14. Finding a market for your business
Family or employees are often potential purchasers. Alternatively, you may like to advertise the business yourself or engage a business broker.
It may take longer to sell your business than you first imagined. Give yourself plenty of time to achieve the best possible return. Also, be mindful that your business will more likely attract interest when it and the industry you are in, is peaking.
In summary, why is it so important to plan to sell your business? Your aim is to gain the maximum price for the business and have an easy transfer. Buyer confidence is the key to achieving this. When the purchaser feels confident, the sale will go through smoothly. Proper planning will go a long way to building confidence in your purchaser.