“Failing to plan is planning to fail”
Every business owner, regardless of size, should have an exit strategy for his or her company. Failing to have a sound, up to date exit plan could cost an owner hundreds of thousands or millions of dollars in sale price.
A key piece to an exit planning involves putting together the right team of advisors. That team should include an M&A (Mergers and Acquisitions) Intermediary, a Business Attorney, a CPA and a Financial Advisor. This team will work together to consider legal, tax and financial matters when considering the sale or merger of a company.
A strategic exit plan begins with valuation. Every CEO should have a firm understanding of what their company is worth in an acquisition.
A valuation measures many facets like cash flow, profit, revenue and both tangible and non-tangible assets like goodwill amongst others. Factors like economies of scale and synergistic qualities with other firms of equal or greater size are also considered.
Part of the exit strategy process should be a look within the company’s infrastructure. Things that can negatively affect the value of the company are:
- Key Employees not having employment contracts with non-compete clauses
- Being over-dependant on one vendor, supplier or manufacturer
- Organizational Chart – not having proper management in place.
- A high percentage of revenue and profit being tied up in one client
- Books and Records – company records, including corporate by –laws, articles and other related items not being organized or up to date
- Patents and Trademarks not being filed and up to date
- Not having clean and organized income statements
The largest factor in valuation however is the company financials. Most buyers, unless Strategic (buying for a particular product or customer, etc), consider EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization) as the determining factor of the value of the business. Having the other items in order will solidify that value; not having them considered with certainly hurt that value.
An important consideration in the value of the company, when reviewing the books, is bottom line profit. While most small to medium business owners live out of their business, it is very important in preparation for a sale to minimize discretionary personal expenses and allow for profit to drop to the bottom line. Saving a few thousand in taxes now may cost a business owner a hundred thousand in sale price later. This should be considered in the year or two leading up to marketing a business for sale.
Another key element to a successful exit plan is a having a solid succession plan in your company. An owner or one key employee should not have all of the intellectual property or contact with clients. The business should be able to run efficiently when the owner or key employees are not available. Having a number of employees cross trained to handle several aspects is very important to perspective buyers.With a great exit plan and the right advisors an owner can maximize the value of their company and move to their next adventure.