Preparing to Exit Your Business
No matter how much you enjoy working in your business, inevitably, there will come a time when you want to retire and/or sell your business. With baby boomers marching into retirement by the thousands, up to 70% of small businesses in ND are expected to change hands during the
But are you ready personally to exit your business? And is your business ready to be sold? Check out these sobering statistics:
- Experts predict only one in five businesses will actually be sold.
- Three out of four business owners either can’t afford to retire or plan to use their business as the primary source of funding for their retirement.
- 93% do not have a plan for life after exiting their business.
- Half have no written transition plan for their business.
- Nearly half will exit involuntarily due to illness, death, or forced exit, yet have no plans in place to cover these events
The key to a successful business exit is having a plan – and the sooner, the better.
Research has shown that business owners who go through an exit and succession planning process 12-36 months prior to selling the company are more likely to:
- Increase the value of the business and payout to the owner
- Pay less in taxes and have more accumulated personal wealth
- Transition more successfully into the next stage of their lives.
- Have fewer regrets after exiting
A business owner should develop a master plan that integrates business, personal, and financial goals into their exit strategy. This process consists of three major components, referred to as the ‘three legs of the stool.’
- Business value
- Personal wealth planning, risk & tax
- Personal wellness & life after exit
Consulting an expert or credentialed business advisor to help you work through these areas can help you begin planning for your business
exit. Once you have this information, you will be in a better position to make decisions about your exit options and timing. The earlier you
begin planning before your exit, the more options you will have. Be sure to continually update your plan as circumstances change.
Below are several common ways a business owner might transfer ownership and control of a business;
each has its pros and cons:
- Family Succession
- Employee buyout
- Sale to outside third party
- Liquidation of assets (Typically, this is the least desirable option and generates the lowest payout to the seller).
An accurate business valuation allows you to make a realistic estimate of the profit from a sale and whether this is going to be sufficient to meet future needs.
There are several different methods that are commonly used in pricing a business. While a costly formal business appraisal is sometimes
beneficial and even required an approximate value or “reasonable range of value” can often be determined by doing a pricing analysis and applying industry-specific pricing guidelines or “rules of thumb” such as a percentage to annual sales revenue or a multiple of Seller Discretionary Earnings (SDE).
In the final analysis, the value of the business is the price that a willing seller and buyer can agree on. Buyers look for a return on their money.
The higher the perceived return on investment, the more attractive the business. And, of course, the more attractive the business, the more
buyers are prepared to pay.
There are a number of issues that can contribute to an unsuccessful sale or a completed sale for less than the potential full value. Some major factors include:
- Unrealistic owner expectations, such as overpricing a business.
- Decreasing revenues or profits.
- Inaccurate or incomplete financial statements.
- A business lacks a diverse customer base and is too dependent on one large customer.
- The owner is the business. Buyers want a business that can operate independently from the current owner.
- Declining industry or market.
- Commercial property issues such as zoning, lease agreements, and required environmental assessments.
- Lack of professional advisors such as a wealth manager, business attorney, and CPA who specializes in structuring business transactions and tax strategy.
Get Help Early in the Process
The good news is most of the factors listed above can be minimized or avoided if given enough time to plan – ideally 36 months prior to your
target sale date. Start by asking the following questions:
- How much do you think your business is worth now?
- When would you like to sell?
- How can you increase the value of your business and improve profit and growth?
- What would you like to do after you exit?
- What annual income would you need post-exit to fund your future lifestyle?
- Who would you like to sell or transfer your business to?
- What steps do you need to take to achieve this outcome?
- What plans can you put in place now to ensure you will enjoy this transition and have no regrets?
For a copy of our free Exit and Succession Planning Guide and/or request help from a credentialed business advisor, please register online at ndsbdc.org.
ND SBDC Description
Paul Smith is Center Director of the ND SBDC Fargo & Southeast Center and Accredited Business Intermediary (ABI). The ND SBDC network of credentialed advisors empower North Dakota small businesses and entrepreneurs to thrive by providing no-cost, confidential business
advising services and resources at every stage of a business life cycle. In 2021, the program assisted approximately 1,800 clients across
the State and assisted in capital formation of nearly $74M. For more information or to register for services, please visit ndsbdc.org.