Exit Strategy – Preparing to Sell Your Business

One of the best proactive actions you can take as a business owner to build your business and increase the business value is to prepare an Exit Strategy for the eventual sale of your business.  Regardless of how far away the sale of your business may seem, preparing an Exit Strategy now will increase the value of your business as well as improve your overall operations and profitably.  

The thought of developing your business Exit Strategy may seem daunting and you may not know where to start, but it actually isn’t that complicated.  We outlined the basic elements of an Exit Strategy below.  If the thought of creating an Exit Strategy is still something you can’t see yourself doing or if you need guidance our firm can consult with you to help you through the process.

Through our experience of selling hundreds of businesses throughout Orange County and Southern California, we have gained a great deal of insight, experience, and understanding about what it takes to successfully sell a business.  The businesses we have sold are in diverse industries but the companies that sold for premiums and sold quickly had several things in common.  

Key Factors Driving Business Value 

  1. Good Financial Performance
  2. Good Financial Records 
  3. Owner Dependency minimal or a path to replace the owner 
  4. Infrastructure
  5. Customer Concentration 

Thing to Address in your Exit Strategy 

Here’s a 7 step outline of what your Exit Strategy should address.  It’s up to you how much detail you want to go into for each item, but each should be addressed.  We outlined the basic elements of an Exit Strategy below, our blog “How to Develop an Exit Strategy to Sell Your Business” goes into more detail for each item. 

  1. Owner Dependency
    Create a plan to reduce and minimize the dependency on you for day to day operations.
  2. Staff
    Develop your staff to take on day to day operational responsibilities and cross train staff members if possible.  Develop supervisors and managers if possible.
  3. Infrastructure
    Develop systems and procedures for your day to day operations.  Review how your business operates and improve your systems. 
  4. Customer Concentration
    If your business has high customer concentration work toward diversifying your customer base through geographic expansion, customer growth, or expanded service offerings.  In some niche businesses this is not possible and in these instances work toward cementing these relationships as much as possible. 
  5. Financial Statements and Tax Returns
    Review your financial statements and tax returns with your CPA and ensure that the owner’s salary is clearly identified as well as all owner’s benefits/expenses.  After an offer is accepted you will have to prove these expenses to the prospective buyer.  It is a much easier process if the owner’s salary and expenses are easily identified and tracked. 
  6. Tax Strategy to Minimize Taxes on the Business Sale
    You should meet with your CPA to plan for taxes on the eventual sale of your business.  By developing a tax strategy you can realize substantial savings on your taxes.  There are a number of tax strategies to reduce and defer taxes on the sale of your business.  If your tax advisor is not familiar with these, contact us and we can refer you to a CPA that specializes in tax planning. 
  7. Financial Performance
    The financial performance of your company, namely, Net Profit, Discretionary Earnings, Sales and growth are the biggest business value drivers.  Broadly speaking, every dollar you add to your bottom line adds two to three dollars in business value.  For example, if you increase your bottom line by $20,000 your business value will increase by $40,000 to $60,000.  

Additional Information and Resources

What are the Steps in Selling a Business? 

FAQs – Frequently Asked Questions About Selling a Business

Financing the Sale of Your Small-Midsize Business with SBA Financing

Summary
Develop an Exit Strategy - Prepare for the Sale of Your Business
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Develop an Exit Strategy - Prepare for the Sale of Your Business
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Creating an Exit Strategy is building your to sell. It will increase the value of your business as well as the marketability of your business. Regardless how far away you think the eventual sale of your business maybe, you should start developing an Exit Strategy now. Key Factors Driving Business Value 1. Good Financial Performance 2. Good Financial Records 3. Minimal Owner Dependency and a path to replace the owner 4. Infrastructure 5. Customer Concentration - high customer concentrations generally reduce the value and increase the time it takes to sell a business. Things to Address in your Exit Strategy 1. Owner Dependency - create a transition plan, train and delegate day to day operational responsibilities 2. Staff - train staff to take on more responsibility, train supervisors, managers, etc 3. Customer Concentration - diversify customer base if possible through growth or cement relationships with key customers 4. Infrastructure - create systems, procedures and train staff of all aspects of the business 5. Financial Statements & Tax Returns - work with your CPA to clearly identify owner's salary, benefits and expense as these are added back to calculate Discretionary Earnings and this increases value 6. Tax Strategy - meet with your CPA to develop a tax strategy for the future sale 7. Financial Performance - the single biggest value driver is simply earnings/Net Profit. Focus on growth in revenue and profit.
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Pacific Business Sales
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