The Benefits of Having a Business Exit Plan
If you plan to sell your business at some point, you should have an exit plan. A business should be a constant ball of energy moving in different directions as the economy changes, new tools and innovations come to the market, the stress and strain from competitors and the ever-changing demands of customers. This is what gets an entrepreneur out of bed every morning; the chance to do something different, learn something new, to see the rewards of hard work, to plant new ideas and watch them grow or to help someone do something they thought they may not be able to do.
If the entrepreneur loses the hunger to learn, be the vision and leader of the business, it’s time for a change. Because business is so dynamic, it requires leadership. If this doesn’t happen it will shrivel and die. Capital, time and energy must keep moving otherwise it will fade away.
If the entrepreneur leading the business recognizes it’s good business to plan for a change of ownership and therefore handle the matter in a proactive way, the chances of success are so much greater and so are the chances of getting the highest price possible. There is a very simple reason for this. The buyer of business looks at and includes many things in their decision-making process. However, there are basically two ingredients, the cash flow the business generates and its potential to generate more cash flow in the future. If either one is missing, the buyer will require a discount on the purchase price of the business. If both are missing, it will be a business extremely difficult to sell.
As the entrepreneur works through their decision to sell the business, a critical component that will help them do this successfully is to start putting into place things the entrepreneur will move to after they sell the business. It can be intriguing to watch older entrepreneurs work through the process of selling a business, handling all the negotiations and questions from the buyer and just prior to signing the documents to transfer ownership to the buyer, decide not to sell. The reason they decide not to sell is that the appeal of cruising the world or playing golf 5 days a week or looking after the grandchildren all of a sudden doesn’t have the same appeal as going to work each day. So a good exit plan for an entrepreneur as its first priority needs to have a clear strategy detailing to what the entrepreneur is going to move.
The next ingredient is to make sure a good team is in place to advise and protect the transition of the business. The team can include accountants, business attorney’s, financial planners, lenders and a business broker to market and handle all buyer inquiries about the business. The most important ingredient to the entrepreneur is trust. If the entrepreneur does not have a trusting relationship with any of the people on their team, they need to be replaced.
Each entrepreneur will have a different risk tolerance to different aspects of the transaction. The current market conditions require a seller to be part of the finance of the transaction. Third party lenders can bridge the gap between the buyer down payment and the seller note, but the seller has to be willing to be in a second position on the loan.
Each exit plan will differ for each entrepreneur. My golden rule is that when selling your business, put your feet in the shoes of the other party and see things from their perspective. This is true not only for the buyer who has no history of the enterprise, has to put down a sum of money they may never see again, has to take the emotional risk of not only being good enough to own and operate the business as well as the current owner, but learn as much as possible as quickly as possible or suffer the embarrassment of it all crashing down on them.
Part 13 and the final article in this series looks at the Transition Plan and how it completes the role and responsibility of the entrepreneur.