Over the next ten years, a large chunk of the US population will be heading into retirement. A smaller percentage of this group are business owners who have poured their blood, sweat, and tears into their companies. But when it comes to exit planning and a company sale, the old adage “where there is risk, there is reward” does not hold true for company shareholders.
Whether you plan to sell your business to fund your retirement or pass it on to the next generation, careful planning is crucial and removing new buyer/ownership risk is key. With five years left before an expected retirement date, it’s the perfect time to start refining an exit strategy. In this blog, we’ll explore the top 10 ways to improve the exit strategy and sale of a privately held business.
1. Assess Your Business Value
The first step in planning your business exit is to determine its current value. Consider hiring a professional business valuation expert who can provide an accurate valuation. Understanding your business’s worth is essential for setting realistic financial goals for your retirement and ensuring a fair sale price. Do not trust an online calculator, or back of the envelope arithmetic to fund the rest of your life. Depending on your industry (transportation, construction, manufacturing, or technology), timing a growth cycle could be key to obtaining maximum value in the sale.
2. Strengthen Financial Records
Potential buyers or successors will closely examine your financial records. Ensure that your financial statements, tax returns, and accounting records are in impeccable order. Clean and transparent financial records instill confidence in prospective buyers and facilitate a smoother sale process. At a minimum, ensure top line revenue and bottom line earnings are at least flat, preferably trending up.
3. Identify Key Employees
Identify and nurture key employees who are critical to business operations and can run the business without the business owners present. Having a reliable team in place not only ensures a seamless handover but also adds value to your business. A business with a dedicated management team in place is more valuable than a business reliant entirely on the owner. Consider offering incentives to retain top talent, such as performance bonuses or equity stakes. The vacation test is a great exercise to consider – Are you able to take a two week vacation, with no internet, and there will be no impact on the business upon your return? If so, you just passed the vacation test!
4. Diversify Revenue Streams
Relying on a single product or customer can make your business less attractive to potential buyers. In the years leading up to retirement, focus on diversifying your revenue streams to reduce risk. Expanding into new markets or offering complementary products or services can make your business more appealing and valuable. A business with a revenue stream that has a service or recurring (repeatable/reliable) portion will have a higher valuation and more competing buyer offers.
5. Streamline Operations
Efficient operations not only improve your business’s profitability but also make it more appealing to buyers. Look for ways to standardize, document, streamline your processes, cut unnecessary costs, and increase overall efficiency. A well-organized business is more likely to fetch a higher sale price. This does not mean you have to radically transform, digitize, or implement AI tools in the business, but that the business will operate as usual when new owners step in place.
6. Develop a Succession Plan
If you plan to pass your business on to a family member or trusted employee, a succession plan is essential. Identify potential successors, provide them with training and mentorship, and outline a clear transition plan. A well-executed succession plan can ensure the continuity of your business after your retirement, and get family relationships intact! There are numerous programs and communities to help improve family succession plans. We are big fans of Seattle University’s Family Business Exchange.
7. Reduce Debt and Right-Size Working Capital
Reducing debt can make your business more attractive to buyers and improve its overall financial health. Focus on paying down high-interest debts and consider refinancing options to lower interest rates. A debt-free business is more likely to yield a higher return when sold. Likewise, a business with inflated cash on hand bank accounts will raise questions from buyers on how much capital is actually required to run the business. Working with a business valuation expert (like Exit Equity!) can help you right size working capital requirements, and help improve how much cash you can extract in the sale of the business. The seller will want the minimum amount of working capital left in the business at the time of sale and the buyer will fight tooth and nail to increase the amount of working capital left in the business by the sellers. Get a professional valuation early so you can maximize your net-to-you in the sale!
8. Build Strong Customer Relationships
Strong customer relationships are an invaluable asset for any business. In the years leading up to retirement, invest in maintaining and deepening these relationships. Happy, loyal customers can help increase the perceived value of your business and attract potential buyers. As discussed earlier, customer distribution is key, but so is having a few big ticket, heavy hitter customers (e.g Boeing, Disney, Microsoft, etc.) that differentiate you from the competition.
9. Seek Professional Advice
Navigating the complexities of selling a privately held business requires expert guidance. Each business has its own unique set of challenges, for example a business owner with a child that will stay on in the sale, an estate plan challenge caring for other family members, property considerations for a 1031 exchange sale of business property and investment into another property in Hawaii, or tax efficient opportunities. Consult with experienced attorneys, accountants, and business brokers who specialize in mergers and acquisitions. They can help you structure the sale, negotiate terms, and ensure compliance with legal and tax requirements. Exit Equity maintains a stable of trusted advisors, working across multiple geographies and industries, to bring the right capable resource to help on the transaction.
10. Create a Comprehensive Exit Strategy
Finally, create a comprehensive exit strategy that outlines the step-by-step process for selling or transferring your business. Include a timeline, financial goals, and contingency plans. This strategy will serve as your roadmap as you move closer to retirement and help you stay on track.
In conclusion, the years leading up to retirement are a critical period for business owners looking to sell or transfer their privately held businesses. By following these ten key steps, you can improve your exit strategy and increase the likelihood of a successful sale, whether you own a small plumbing company, a regional healthcare staffing business, or a boutique technology/software development agency. Whether you plan to retire in five years or further down the road, proactive planning and careful execution are essential for realizing the full value of your business and securing your financial future.