Nevertheless, it was better for Al, a lifelong Boy Scout leader, to know what to do in case of a fire. Many small business owners fail to have the same appreciation for knowing how to get out of their businesses, though. Exit planning benefits owners of all stripes, irrespective of their size or rung on the ladder of commercial success.
Business owners tend to fall along a lifecycle outlook continuum. At one pole are “serial” owners, who start a business knowing the venture will not hold their attention; they prefer “starting” to “running” a business. “Career” owners, at the other pole, dig in toward building a legacy, believing they can make it viable and ultimately sell the company to recover their investment.
Only one in 15 small businesses sold today will result in the owner realizing any equity. Family-owned businesses fare better, but still only three in 10 succeed into the second generation. Ten million baby-boomer-run businesses will come to market by 2025, only 20 percent of which will be successfully acquired. Eight million small businesses owners will walk away with nothing.
No matter where one’s tendencies lie along the “serial-to-career” outlook continuum, a small business is often the largest asset in an owner’s estate. If you are banking on your business to establish wealth for retirement, heirs or another venture, it is time to take a macro-view.
The path to success lies in embracing a serial entrepreneur’s perspective: You will leave your business someday, so prepare for it now. See your business as a commodity; decide what there is to carry on if you are not at the helm. Whether you are ready to leave yet or not, this stance helps identify what to update and trim in order to market your business or prepare it for heirs — your “exit strategy.”
Crafting an exit strategy has two phases: data gathering and task planning.
Data gathering starts with a 360-degree operations audit. Look first at internal quantitative and qualitative metrics. Quantitative data includes historic and projected growth, bottom-line profitability and revenue predictability. Consider solvency of key customers and percentage of revenue from the top 10, as well as expenses compared with that of your industry and competitors. Relevant qualitative factors to consider include quality of your product or service, currency of your core business tools (software), staff skills, employee compensation for region, and employee loyalty.
Second, the audit should reach outside to customers, suppliers, accountants and attorneys. Do they see your business exposed anywhere? What do they like about your service? Where are your proficiencies?
This audit mirrors a buyer’s due diligence in assessing the risk of acquiring your venture. It gives you an indication of the multiple of EBITDA — earnings before interest, taxes, depreciation and amortization — where your business might sell today. The answers also highlight current inefficiencies, the lack of knowledgeable managers to maintain key customer relationships being common among small businesses.
Task planning for your exit strategy requires plotting the point at which you want to leave the business, and forecasting how long it will take to cure the inefficiencies identified above. The core of your exit plan then lies in determining what you can and want to do before you reach the exit date.
Marketability of your business grows by winnowing down what holds it back and improving delivery on items your customers identify as valuable. This locks in client-retention through sale or succession, increases efficiencies and tempers a buyer’s perceived risk. It is easier for a buyer or heir to see himself or herself in a lean business, with a loyal customer base and knowledgeable managers than in a fixer-upper.
True wealth preservation in an exit strategy, however, requires consulting with tax and legal advisers who can help you plot target dates and position a sale or transition to leave you with the best result.
Failing to prepare an exit strategy is like running for the fire escape wearing a blindfold; the odds of making it to your destination are slim and more harrowing than necessary. Plan how you want to transition you business today and make sure you are doing all you can to realize the value of your sacrifices along the way.
Cyril Vidergar is a partner in the Samson & Vidergar LLC law firm. He specializes in start-up business planning, commercial transactions, estate planning for business owners and craft-brewing law. He can be reached at email@example.com.