Every Business Needs an Exit-Strategy Plan
Although most business consultants consider an exit-strategy plan essential, only 52 percent of businesses have one, according to the Investor Watch Report.
“Based on my experience, that figure is much lower, particularly for small businesses that sell for under $10 million,” says Jason Hubler, founder of Exit Strategy Solution, LLC, in York. “Most mom-and-pop businesses have no idea how they will exit their business.”
An exit strategy is a plan, ideally in writing, for an owner’s eventual transfer of the business to another owner.
Hubler says many small-business owners believe they will sell their business to relatives. Yet, less than 1 in 5 relatives (18 percent) expressed any interest in the business.
If an exit-strategy plan is deemed so important, why do so few business owners have them?
Hubler, who has a doctorate in business administration, chalks it up to a number of factors.
“Most small-business owners are busy just trying to survive,” he says. “They have little time to think about long-term strategies. And, they don’t want to think about leaving the business. They often wait until their health and their revenues decline before thinking about selling the business.”
Experts say there’s a significant psychological barrier to overcome at the thought of not being in business. It is, for some owners, akin to a type of death.
Hubler says owning a small business is like having an invisible savings account. You can’t access it without selling. When you sell your business, it’s like breaking open the piggy bank.
“Business owners are accustomed to a certain level of income and standard of living,” he says. “Owners need to sell their business to access money to maintain those levels. It’s important to get the most value for your business.”
Hubler, however, says very few, if any, small-business owners have a real idea of the value of their business.
“I ask business owners what they think the value of their business is,” he says. “When they tell me the amount, I tell them to divide by four and that’s much closer to the value. It’s very difficult for most owners to be realistic about the value of their business.”
According to Investor Watch Report, only 58 percent of businesses have ever had their business formally appraised.
“You should know the value of your business from day one and every day moving forward,” emphasizes Hubler, a certified valuation analyst. “It shouldn’t be a guess.”
Hubler points out that while an employee only needs to give an employer a month or two of notice about retiring, it typically requires at least three years for an owner to prep a business to sell for a premium price.
When should a business owner think about creating an exit strategy?
“As soon as retirement crosses your mind for the first time,” stresses Hubler. “It’s really never too early.”
Many business brokers and advisers recommend incorporating an exit strategy into the business plan from the start.
Bruce Hakuitzwi, an expert in buying and selling businesses, writes that this is “the smartest plan in today’s fast-moving economy.” He adds that an exit-strategy plan provides a blueprint for success: “It helps define success and provides a timetable for charting your progress.”
Hubler says the first steps in developing an exit strategy are determining whom you are selling to and then cleaning up the business’s bookkeeping and accounting to reflect maximum value.
He says most business owners are accustomed to focusing on tax reductions rather than increasing value.
“For every $1 saved on tax reductions, you lose $3-$5 on the value of your company. Owners need to focus on increasing the value of the company in order to obtain the maximum price for the business,” he points out.
The next step is to establish an initial value for your business, based on its income and expenses, contracts, customer base, and equipment.
There are a number of exit strategies available, and there is no one-size-fits-all. Exit strategies will vary by companies and their specific situations.
Exit options include private sales, management buyouts, co-owner buyout, an employee stock-ownership plan, retention of ownership but becoming a passive owner, liquidation, and gifting the business to relatives. Larger companies may consider an initial public offering (IPO) as an option.
There is plenty of help available to business owners who want to develop an exit strategy. Hubler says using a business broker or consultant to develop an exit strategy is similar to using an accountant for financial services or a lawyer for legal services.
“The majority of business owners don’t have a full understanding of what it takes to sell a business,” he says. “After all, most of them have never sold a business. Statistics show that 75 percent of business owners think they can sell their business in a year or less. In reality, it takes much longer.
“The experience of a business broker is invaluable,” stresses Hubler. “We know how to bring everything together. We know what buyers and lenders are looking for, and we know how to talk their language. You only need one thing not to be right to have your banker and buyer cast doubt on all of your numbers.”
Hubler says an exit strategy is a process that requires time, thoughtfulness, and patience. And, in the end, it delivers a tremendous payoff.