Before exiting your business, it’s essential to take the time to create an exit plan that outlines the steps you need to take to transition out of your business seamlessly. For many small business owners, their business is most of their net worth. Therefore, a sound exit plan helps avoid common missteps. Additionally, it can help maximize the financial outcome for the seller.
An exit plan is a proactive plan for business owners to navigate the transition process and ensure the new owner can transition into the business smoothly. With an exit plan, business owners can identify ownership transfer issues and help minimize risks and taxes. There are several components all exit plans should have, they include:
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Set goals for what you want to accomplish – the desired outcome
An exit plan should start with your goals, including the desired price, timeline, and deal-breakers. Then, think about how you want the process to go and the end result for you, employees, partners, and customers.
Setting clear and measurable goals that are realistic is the first step and will drive a lot of your exit plan. It’s recommended that business owners consult with an exit coach. A coach can help craft a personalized exit strategy that will enable an owner to explore all their exit options and understand the pros and cons of each. An exit coach can create a tailored approach that is solely focused on reaching the objectives set by the business owner.
Accurate, up-to-date, and complete financial records
Having accurate financial records is a must (unless you plan on liquidating assets and dissolution). The financial records of your business will often dictate key factors like the valuation placed on your business. In addition, buyers will ask for several years of your financial records as part of their due diligence. Therefore, it’s essential to have digital (soft) copies of financial records handy to remove friction in the buying process for your prospects and avoid a prospective buyer finding errors or missing information during due diligence. Also, suppose you have more than one prospective buyer. In that case, it is vital to make sure everyone in the process receives the same information.
You can take several steps to ensure your financial records are accurate. This includes
- Using accounting software: Accounting software allows you to generate various reports such as income statements or a balance sheet. If you use Quickbooks or Xero, take the time to learn how to generate different reports and review them, and make sure they are accurate.
- Hiring an accountant: An accountant may be the best way to get your financial records up to date. An accountant can go back several years and correct anything incorrectly recorded.
Valuation of the business
A valuation of your business based on your historical financials and projections is the best way to get an accurate and objective assessment of your business’ worth. With an accurate valuation of your business, you can start to explore all of the exit options available and engage prospective buyers to establish a sale price.
Your business valuation can be based on an asset-based approach, earning potential approach, or a market value approach. A business valuation also enables you to account for all the assets in your business. This is very helpful if you decide to select certain assets to include in the sale of your business.
Options to increase the value of the business
Depending on timing, you may explore how to increase the value of your business. Then work toward an exit in the future. Some ways to increase the value of your business include:
- One of the most obvious ways to increase valuation is to increase revenue.
- Reducing discretionary expenses is another way to improve the profitability of your business and, in turn, valuation. This may include car leases, memberships, or other non-essential expenses.
- Capturing intangible assets, such as customer lists, business processes, or know-how. Many owners have some of these intangibles in their heads, but they’re are not well documented. A new owner that can easily access this information may assign value to it, which could bump up your business’s value.
Exploration of exit options
Your goal may be to sell your business at a specific price and by the desired date; however, you do have options if that does not work out. It’s important to understand these options to make sure you are making the best-informed exit decision. Some exit options include selling the business immediately, liquidating assets over time, and selling the company to an employee/competitor. Ideally, your preferred outcome is viable. However, if you cannot find a buyer, do not despair. There are options. For example, growing the business now to make it more attractive to a buyer at a later date.
Up to date taxes and licensing
Taxes! Yes, you will need to make sure your business is current with all required tax filings; whether you are selling or dissolving the business. So, if you have any outstanding balances or penalties, it is best to address these before engaging a prospective buyer. The last thing a buyer wants to hear is that large outstanding payments are due for the business from unresolved taxes and fines.
Additionally, you should have current copies of all of your licensing and permits for your business. You need to remove any friction in this process. For instance, ensure all of your licensing work is completed and up-to-date. If they are set to expire, it is likely a good idea to renew them. Therefore, a buyer won’t make this request or use it to reduce the price of the business.