Exiting Your Business: Have you done your homework?

By Signal Contributor

Last update: Wednesday, December 14th, 2016

So, you’ve been thinking about exiting your business. Is selling your only option? Are you financially and mentally ready for exiting your business? Ponder these and other important questions when considering an exit strategy.

Your company is likely your single largest investment. So it’s essential to employ a thorough, comprehensive exit strategy for the best chance of achieving your financial readiness and mental readiness goals.

Let’s take a closer look at the exit landscape. Of the more than 20 million private business owners in the United States, 12 million are baby boomers, of whom 70 percent will try to exit their business within ten years. But only about 20 percent of these businesses will be successfully sold. Why?

Sellable vs unsellable

Several characteristics distinguish businesses that have a good chance of being sold from those that don’t. A business with a high salability factor tends to have a good management team, steady and defensible profits, customer and vendor diversification and loyalty, a solid reputation, predictable transferability, and intellectual capital.

Harder to sell companies also have things in common. The owner may be too involved in the business for it to transition successfully. Desire to keep family and key employees in the business can outweigh selling to an outsider. Other factors: buyers cannot get financing, a poor economy is eating into or eliminating profits, or the seller has an unreasonable price expectation.

Four types of owners

There are four types of exiting owners based on financial readiness and mental readiness. Which are you? Financial readiness is determined by the extent to which you are not dependent on the proceeds from your exit to meet your long-term financial goals. Truthfully answering the question “Am I ready to leave the business?” will tell you if you are mentally ready to exit the business.

  1. The owner who is well off but chooses to work has high financial readiness, but low mental readiness.
  2. The owner who is rich and ready to go has high financial readiness and high mental readiness.
  3. The owner who wants to stay and grow has low financial readiness and low mental readiness.
  4. The owner who says, “get me out at the highest price,” has low financial readiness, but high mental readiness.

Every private business has several exit options and values to consider. It depends on the type of transfer the seller chooses. There is no single value for the shares of your privately held business. The range of exit options includes sale of the business; private equity group recapitalizations; employee stock ownership plans (ESOPs); management buyouts; gifting programs; shutting the business down; and liquidating and selling off.

Another factor to consider is how to value the business, specifically fair market value (FMV) versus market value (MV). FMV is used for internal transfers (gifts, charity, family, ESOP) and is usually lower than open market (MV) transactions (transfer to a competitor or other outside buyer).

OK, you’ve got your exit strategy finalized and you’re ready to embark on your course of action. You’ll need a transactional advisor to help find a buyer and close the deal. Who is right for your size business?

Here’s a rough rule of thumb for transactions of various sizes:

Other advisors, such as your CPA, attorney, wealth manager and valuation expert may be engaged to assist with vital parts of the valuation, negotiation and consummation of the sale of your business.

The article had several contributors from Business Advisors with the Small Business Development Center (SBDC) hosted by College of the Canyons (COC) serving Northern Los Angeles County – the Antelope, San Fernando, and Santa Clarita Valleys. The column reflects contributors’ views and not necessarily those of The Signal. For more information about how the SBDC can help your business, please call 661-362-5900, or visit www.cocsbdc.org.

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Exiting Your Business: Have you done your homework?

So, you’ve been thinking about exiting your business. Is selling your only option? Are you financially and mentally ready for exiting your business? Ponder these and other important questions when considering an exit strategy.

Your company is likely your single largest investment. So it’s essential to employ a thorough, comprehensive exit strategy for the best chance of achieving your financial readiness and mental readiness goals.

Let’s take a closer look at the exit landscape. Of the more than 20 million private business owners in the United States, 12 million are baby boomers, of whom 70 percent will try to exit their business within ten years. But only about 20 percent of these businesses will be successfully sold. Why?

Sellable vs unsellable

Several characteristics distinguish businesses that have a good chance of being sold from those that don’t. A business with a high salability factor tends to have a good management team, steady and defensible profits, customer and vendor diversification and loyalty, a solid reputation, predictable transferability, and intellectual capital.

Harder to sell companies also have things in common. The owner may be too involved in the business for it to transition successfully. Desire to keep family and key employees in the business can outweigh selling to an outsider. Other factors: buyers cannot get financing, a poor economy is eating into or eliminating profits, or the seller has an unreasonable price expectation.

Four types of owners

There are four types of exiting owners based on financial readiness and mental readiness. Which are you? Financial readiness is determined by the extent to which you are not dependent on the proceeds from your exit to meet your long-term financial goals. Truthfully answering the question “Am I ready to leave the business?” will tell you if you are mentally ready to exit the business.

  1. The owner who is well off but chooses to work has high financial readiness, but low mental readiness.
  2. The owner who is rich and ready to go has high financial readiness and high mental readiness.
  3. The owner who wants to stay and grow has low financial readiness and low mental readiness.
  4. The owner who says, “get me out at the highest price,” has low financial readiness, but high mental readiness.

Every private business has several exit options and values to consider. It depends on the type of transfer the seller chooses. There is no single value for the shares of your privately held business. The range of exit options includes sale of the business; private equity group recapitalizations; employee stock ownership plans (ESOPs); management buyouts; gifting programs; shutting the business down; and liquidating and selling off.

Another factor to consider is how to value the business, specifically fair market value (FMV) versus market value (MV). FMV is used for internal transfers (gifts, charity, family, ESOP) and is usually lower than open market (MV) transactions (transfer to a competitor or other outside buyer).

OK, you’ve got your exit strategy finalized and you’re ready to embark on your course of action. You’ll need a transactional advisor to help find a buyer and close the deal. Who is right for your size business?

Here’s a rough rule of thumb for transactions of various sizes:

  • Up to $5 million: business broker
  • $5 million – $25 million: merger & acquisition specialist
  • Greater than $25 million: investment bank

Other advisors, such as your CPA, attorney, wealth manager and valuation expert may be engaged to assist with vital parts of the valuation, negotiation and consummation of the sale of your business.

The article had several contributors from Business Advisors with the Small Business Development Center (SBDC) hosted by College of the Canyons (COC) serving Northern Los Angeles County – the Antelope, San Fernando, and Santa Clarita Valleys. The column reflects contributors’ views and not necessarily those of The Signal. For more information about how the SBDC can help your business, please call 661-362-5900, or visit www.cocsbdc.org.