In the beginning, every business owner acquires or starts a business. Rarely is there any game plan for how to exit the business at the beginning.
Most business owners decide they want a business to pursue their passion, invest money to get a return on capital, or simply take their job or skills and make it into a business. They may have some vague idea of building a business to create equity but the end is usually far from the mind at the beginning.
What is an exit strategy? Well, there are a number of exit strategies. There is always that “dream” of “going public” and getting millions or billions of dollars. Going public is just a variation of the category we would call “selling to a third party”. The third party could a stranger or a competitor, or just someone already in the business who wants to get a foothold in your geographic territory.
Just as in our scenario described earlier in the book, after working for twenty-five years, two owners decide that they want to sell their business and retire. They begin working less but have not trained anyone to do the technical things that they do so well. Of course by working less, less technical tasks get fulfilled and less income rolls in. The best preparation would have been to sell before income goes down and, better yet, have installed the six systems described in Section 2 that would have literally doubled the value of your business.
The lesson is that you need to begin preparing to sell a business probably years before the business is sold or even offered for sale. You must have the six systems in place, understand the value of your business and be prepared in advance for the eventual sale of your business. Your business is not an investment that buyers drool over.
Janet owns a business in a corporation. The sale is proposed to her as a sale of assets and no assumption of liabilities. Although the sale of assets will be treated as a long-term capital gain at the corporate level, she has not considered how she will get the money out of the corporation and into her hands personally. Unfortunately, she has also signed the Purchase and Sale Agreement without consulting her attorney or her accountant. How much tax will she have to pay?
There are a number of options that could have been considered on how to structure the transaction. Unfortunately, she should have had a game plan and run the numbers on all of the options BEFORE she signed the purchase and sale agreement. By not planning in advance, some owners have actually unintentionally structured transactions that were taxed at ordinary income rates rather than long-term capital gains rates!
Albert wants to sell his retail business that has a ten-year track record. The business provides Albert an income of $150,000 per year. Albert has done his own valuation of what he thinks the business should sell for and wants a price of $1,500,000 for the business, a factor of 10 times his net income. Unfortunately, in the retail sector of Albert’s business, the market rate is only a multiple of three times the net income, a price of $450,000.
Because of his unrealistic price, Albert will not be able to sell his business.
Part 1 of 4: Introduction. Here are the Three Deadly Weapons that can wreck the sale of your business:
These weapons are based upon my experience, discussions with many business owners, and many years of representing businesses in and out of the courtroom. There are 700,000 businesses that will come on the market and change hands every year. That number represents 30% of 2,500,000 businesses that owners will want to sell every year. 70% of the businesses do not sell. Many of those end up being liquidated for lack of a buyer.
You can learn how to avoid these three mistakes that will literally cut the sales price of your business in half. Think about having a business that should be worth $750,000 but only being able to sell it for $375,000. If you do not pay attention to three factors in selling your business, you literally may only receive half of what your business is worth.
The discussion about retirement is at times a very fascinating topic. For some, retirement may mean continuing to work doing exactly the same thing as long as one is physically able. For others, retirement may mean playing golf every morning and doing absolutely nothing else. This issue is important to your exit strategy because what you plan to do determines your process to get there.
I have a friend who has done something that I consider to be rather unique. He was in sales for many years and decided to approach retirement the same way that he would approach any business deal, with a written business plan, complete with the exit strategy. His plan outlined what he wanted to do with his time to meet his goals of giving back to society, exercising his mind, and staying busy. He proceeded to lay out a plan to obtain an advanced degree from the local university in a field that intrigued him. He then decided to join Rotary International with its motto of “Service Above Self”. By actively working on service projects, he was able to focus on paying his success back by serving others. Lastly, he decided to serve on the Board of Directors of a non-profit organization to stay busy while also accomplishing his goal of paying back to society.
Some people that I have visited with about retirement plan to do absolutely nothing other than play golf four or five times a week. While a very enjoyable pastime, many of these individuals find that, as a steady diet, this plan is very difficult to adjust to after the rigors of running a business for a lifetime.
So why bring this subject up? When designing an exit strategy, you must give thought to what you are exiting to as a goal. Too many people work all their lives with “retirement” as their goal, only to find that retirement does not suit them or, worse for many, literally die within two or three years after retiring. Some serious thought on the potential for how you will spend your retirement is critical to future happiness. Selling a business that has been your life’s dream without giving any thought to the next stage could be a monumental mistake.
As we will discuss more thoroughly in Section 2 sometimes the best exit strategy is not to actually exit at all but rather to “fire” yourself. In other words, the business continues operating without your day-to-day input while generating a cash flow that you to enjoy as the owner-investor.