Preparing a business exit strategy: Key factors to consider

As a business owner, deciding when to sell your business can be one of the most difficult decisions you make. Yet inevitably, this time will arrive, so having a business exit strategy in place is crucial.

The challenge may be more pronounced if you’re a founder-owner of your business. In many cases, a founder-owner is also the most important employee to the organization. Adding to the complexity is that your personal wealth objectives are critical to the outcome of the sale, even though buyers will view it as strictly a business transaction.

The time it takes to sell your business can be significant. Preparing the business for a sale can take a year or longer. The sale process itself can take up to another six months or more. That’s why it’s so important to have a plan in place well in advance of the intended sale, whether you’re focused on retirement or just looking to sell the business and move on to the next venture.

Once you’ve made the initial decision to sell, the real work begins. As you assess the desired objectives and time horizon for your sale, be sure to allow sufficient time to complete the process in the most effective and comprehensive manner.

As you prepare your business exit strategy, keep the following considerations in mind.

1. Factor retirement age into your business exit strategy

In the most common circumstance, you may be looking to sell as you approach retirement. In this situation, don’t expect to make a snap decision to put the business on the market and be detached from it quickly. “You want enough time to reduce or eliminate risks that might reduce the value of the business,” says Thomas Smith, senior vice president and managing director of Business Owner Advisory Services from U.S. Bank Wealth Management. “A major risk for the buyer is the imminent departure of a business owner who is still the key employee of the firm.” That situation could negatively impact the company’s value in the market.

Smith recommends that in most cases where the sale is tied to retirement, the owner plan to remain with the business for a period of time. “Buyers may be more attracted if the previous owner agrees to remain actively involved for two-to-three years to help facilitate a smooth transition,” he says. An alternative is to have a qualified replacement designated before new ownership takes control.

2. Have your financial records and sales objectives in order

It’s important to have accurate and up-to-date financial data ready to show potential buyers as part of your business exit strategy. It might take one-to-two months to pull together all the information they expect to see. It includes:

• Up to three years of historical financial performance, including monthly information for the past two years, plus year-to-date numbers for the current year to give buyers a sense of performance and trends
• Descriptive information about your company, its customer base and its strength and weaknesses
• Organizational charts and identification of key employees
• Insights into the competitive landscape in which the company operates

If your business has one, the support of a strong controller or chief financial officer can be instrumental at a time like this. Smith also recommends an outside, independent accounting firm review the numbers to validate the information you’re providing to potential buyers.

3. Pursuing third-party buyers

The search for potential buyers can be done in conjunction with the background work that’s underway. As you begin the process, consider what you’d like to accomplish from the sale. “Owners who want to maximize the value for their business are likely headed toward a competitive auction to find a buyer who offers the best price and terms,” says Smith. In that instance, the universe of potential buyers may be quite broad.

Yet in many cases, Smith has dealt with founder-owners who, while still seeking a full and fair price, have other considerations in mind. “Many are concerned about the future for their employees,” he says. “They want to find a buyer who will keep the business functioning and keep their employees on the job. ‘Top dollar’ isn’t top on the list if it means eliminating a number of jobs to achieve this.” In this type of situation, the search for a buyer may be narrowed. The focus turns to finding a good cultural fit.

Typically, indications of interest from potential buyers are solicited and initial bids are provided. These tend to be ballpark estimates that don’t necessarily resemble the final agreed-upon sales price. After you determine which offer looks most appealing, the next step is to obtain a letter of intent. “While generally not legally binding,” says Smith “the parties are agreeing on a roadmap to a definitive, binding agreement.” Even at this point, there may be another four months or more left in the process, assuming all goes well.

Some potential buyers may want to dig more deeply into the company’s financial and legal records and even go so far as to talk to some of the company’s customers. Buyers often have an accounting firm conduct a “quality of earnings” analysis to verify that the numbers being reported are accurate. After all of this is completed, final negotiations can get underway.

4. Selling to partners or employees

In some cases, the potential buyers of your interest in the business may come from the inside. If there are partners in the ownership, one partner seeking to sell may try to come to an agreement with other partners in executing a sale.

“The big question when selling to a partner is to what extent the partners are on the same page,” says Smith. He has seen situations where partners who mostly agree on how to operate a business have significant differences when it comes to terms of a sale. Good communication that leads to alignment on priorities is important to help facilitate a smooth transition.

Some business owners want to create an opportunity for employee ownership of the firm as part of their business exit strategy. This can be accomplished with an Employee Stock Option Plan (ESOP), which is a trust and is incorporated into a retirement plan for an organization. It offers tax advantages for the seller and for the ESOP as ultimate owner of the company. Employees who participate in an ESOP will be vested in the plan after a specific number of years, which encourages them to remain with the business over the long run.

“It doesn’t work for all businesses,” warns Smith. He feels it’s most appropriate for companies where the chief asset is human capital. This can include architectural, engineering and accounting firms.

5. View unsolicited offers with caution

It’s easy to be swayed by an unexpected offer to buy your business, particularly if the initial offer is for a price that exceeds your expectations. “If you haven’t clearly thought out your goals and objectives and aren’t committed to maintaining discipline through the process, it may not work out as you expect,” says Smith.

In Smith’s experience, he’s seen such offers lose value as the negotiation process continues and says owners should be careful not to put too much faith in what may come of it.

The decision to sell requires commitment

The irony of selling your business is that when it occurs, often later in your career, it will require a significant commitment of time and effort on your part. “It can be a full-time job on top of your already demanding work,” says Smith. Before you start, be sure of your own commitment to see the process through on your terms.

Also make certain you can devote time to the steps that are required to achieve your objectives in selling the business. It can be beneficial to work with an advisor who can help oversee the process, work on identifying and contacting potential buyers and help guide you through the various and often complicated steps.

It bears repeating that the sale process itself will likely take six months or more. Depending on the makeup of your business, it may require that you stay involved for a period of time before you fully separate yourself from service.

Considering transitioning your business? Business Owner Advisory Services from U.S. Bank Wealth Management can be your strategic partner to help drive action.