We here at BW Brokerage would like to talk a little bit about exit strategies for small business owners. Unlike most jobs, where you can simply quit when you feel like it, leaving behind a small business is a much more complicated matter. Most business owners usually start with a great idea and a good plan to grow the business, which combined with a lot of hard work and effort, enables them to become successful, but very few go on to plan for their eventual exit from the business. So, in this article, we are going go over 4 main exit strategies along with their benefits and pitfalls.
The first exit strategy is Delegation. If your business has excellent systems, you may be able to reap the benefits of distancing yourself from its day-to-day activities while still enjoying some of its profits. To successfully implement this exit strategy, you would need to have an efficient and profitable company, it needs to be stable, and of course have a highly motivated and competent workforce. You would need to compensate your staff well enough to make it worth their while to remain and continue doing a good job. Now that’s what happens in an ideal world but this example we are about to share is what happens all too often in the real world.
Unfortunately, we had a client who attempted to run his business absentee, hired a family member as his manager, and that manager was not very committed. As a result, our client’s sales decreased over $150,000 annually and he had to go back in the store and rebuild his business before it could be readied to sell.
Once you have successfully delegated the day to day operation of your business, you still need to have a plan to completely transition out of the business. The good news is that it will be very easy for someone like BW Brokerage to help you sell your business (see Exit Strategy 3 below) with all the key components in place.
The second exit strategy is Succession, which is the process of leaving your company to your employees or your descendants, making them into owners. Succession planning often occurs when an owner dies or becomes otherwise incapable of running his/her company. This requires advance planning because once the owner is dead or incapacitated; he or she is unable to make critical decisions. Successful succession planning involves developing strategies for who will assume key responsibilities, and how much equity each new owner will receive.
Here is another example of where a lack of planning had unfortunate results. We had a situation where this man owned a machine shop for 40 years. He died unexpectedly and never planned for anyone to take over. He never trained employees to become owners. His wife knew next to nothing about the business. She did not engage a business broker to help her and sold off the business for a mere $40,000 instead of the roughly $200,000 it should have been worth. This man’s 40 years of goodwill, profits, blood, sweat, and tears went down the drain because of lack of planning.
Our third exit strategy is to Sell Your Business. This is the ideal way to go and also where we come in. As business brokers, this is what BW Brokerage can do for you. We will evaluate your business, create a marketing plan, prequalify potential prospects, negotiate the transaction, and most importantly, close the deal.
Selling your business involves packaging it as a product that another entrepreneur will want to buy and operate. To sell your company you must update your books, complete financial statements, balance sheets, and tax forms from previous years so prospective buyers can understand what you do and how much money you earn. So, if you are thinking of selling your company in the next three years, now is the time to cut down on your owner’s benefits and show a little more profit. Yes, pay Uncle Sam a little more in taxes and when you go to sell your business you will get top dollar. You will also need to train the new owners to sufficiently prepare them to take over your business.
When you are ready to sell your business you need to be prepared to have three years of tax returns, three years of financial statements, a copy of your lease with hopefully at least five years left, and a list of equipment that conveys, because those are the assets you are selling, plus the good will.
The fourth and final exit strategy we want to mention is Liquidation, which, just like selling your business, is also a time to call your business broker. Liquidation is the process of selling your company's assets and simply terminating your business activities. Some of your assets will have value to outside buyers, such as equipment and vehicles. Other items that may have required considerable investment on your part, but will not be useful to anyone else, such as buildouts and stale inventory, will not be worth much. Liquidating a company is usually the last resort because it is far more preferable to keep your company active and also sell intangible assets such as trade secrets, recipes, systems and good will.
As a final example, we had a client who kept buying companies, spread himself way too thin and did not devote enough time to one of his Businesses. As a result, the company was not profitable; the equipment not in great condition and all we could do was sell off assets, with 2/3 of his investment lost.
Exit strategies may not seem like an item to focus on when you are in the nitty gritty of running your business day-to-day, but a little time spent preparing now can result in a huge payoff later. Planning ahead also saves yourself, your loved ones, and your employees from unnecessary stress when the inevitable time comes to move on to the next phase of your life. If you would like to discuss an exit plan tailored to your needs, please contact us and we would be happy to assist you.
