Greetings!
Each month in this newsletter I strive to provide useful information to business owners and those who provide service to these business owners. This month my article is about when a business owner should begin planning for the sale of the business. |
When is the best time to begin planning for the sale of my business? |
With a large number of business owners approaching retirement age this is a question that is on many of their minds or it should be.
The correct answer is that they should always be planning to exit the business.
Unfortunately, most business owners address the subject of an exit strategy when an event creates a sense of crisis. These events may include death of an owner, divorce, loss of a key employee, increased competition, or illness. What usually follows is a call to a business broker who will put in place a marketing plan to sell the business.
At this point it is too late to plan; anything you do is reactionary.
Developing a plan to exit the business is a process that ideally should begin the day you start the business. Not only will you receive a greater return, you will also build a well run company, that is based on setting goals and the execution of a strategy. Generally the structure of this exit strategy begins with a clear vision of what the owner expects from the business. These expectations may include: transfer of control to the children, time off to enjoy a leisure life style, or starting a new venture. In most cases except liquidation, the business will be sold. In all cases there will be a transfer of majority ownership interest.
This first thing an owner should do is put themselves in the shoes of the person who may buy the business. Think about what they want to see and know, in order to value the company as much as you do. It is also good to keep in mind that buyers are usually financial people that believe that everything is contained in the numbers. With this in mind it is good to put together a realistic business plan and measure your progress against the plan. It is also important to ask yourself the following questions:
- Are my accounting records maintained on a basis with Generally Accepted Accounting Principals?
- Do I have strong management team? (Can they run the company for 3 months without me?)
- Do I have the business processes documented?( Or is it all in my head.)
- Do I have risk factors such as a concentration in one customer or product? (Is one of my customers more than 10% of my business?)
- Am I ready for the due diligence process?
- Do I have outside professionals to assist me with this process.
- Do I use Key Performance Indicators to measure my company's progress in critical areas?
In addition to these questions, it is also important to be prepared to provide the following information to prospective buyers: - Five years of professionally prepared financial statements and tax returns.
- Biographies of key management personnel.
- Ownership Structure.
- Description of the company's niche, and why?
- Litigation and other disputes.
If you think you have all the bases covered, you should decide on the best exit alternative. That alternative may change depending on the stage the business is in. If it is in the early stage, a sale to support the owner's family or partners may be the goal. Later, a sale to an up and coming family member, or employee may be the goal, or to a third party to enjoy more leisure time may be the objective. In these stages, different strategies may be developed concurrently. In any event, having a good documented plan, quality financial reporting, and strong management practices will show value to a potential purchaser or to a financier of an employee or family member and produce less stress at a critical time for the business and owners family. |
