Exit Right – How to Go Out in Style

by

Joan M. Gruber Ridley, CFP

Ready, Fire, Aim

That seems to be the business owner’s mantra. Maybe that’s one reason 70% of all business transitions fail. Lack of planning, poor market conditions, and not understanding how buyers and their lenders assign value are three of the most common reasons that businesses fail to attract top dollar, or, that transactions do not close.

What’s it Worth

Your business could have at least 15 different values at any one time depending on who is assigning value and for what purpose. For instance, a banker, insurance company, investor, and the IRS all have different criteria for assessing value. If you are depending on another seller for information about value, you might misunderstand how his buyer arrived at the closing price. For instance, if a seller in the same industry as yours had $10MM in sales and he tells you he sold the business for $8MM, you might conclude that businesses like yours sell for 80% of sales. In reality, the value was more likely determined by applying an industry standard multiple of EBITDA, adjusted for the presence or absence of value drivers. And, sometimes sellers misrepresent the extent of their good fortune. Also, allocation of sale price, with tax considerations, can be misleading. You might also have additional misinformation about the terms of the transaction. The seller might not tell you that he financed a significant portion of the transaction, or that the terms included an earn-out.

Be Clear About What You Are Selling

Are you self-employed with a high income and lots of perq’s, or, do you have a bona fide business with systems in place and a written strategic plan to insure a buyer of sustainable increasing cash flow? While most buyers will be attracted initially to a profitable business, they will head for the door if profit is what you are selling with no plan to insure that it will continue. For a buyer, it’s all about risk versus reward. If you own the building, that will please your banker, but not your buyer unless the building is an integral part of your business. Also, buyers want to invest in cash flowing businesses and not real estate, unless the business has significant sales volume and is cash flowing extremely well If the building is worth more than the business, you will need to rethink your strategy.

Size is Important But Measurements are Key

While sales volume and the level of profitability are important, buyers will look for measurements and indicators of the soundness of the business. Fuzzy accounting and excessive add-backs will detract from value. Personal expenses disguised as tax deductible business expenses will alert the buyer that you are not trustworthy. You deceived the IRS, therefore you will deceive the buyer, so his thinking goes. Loss of credibility is a deal-killer. Begin to see accounting and record-keeping as a way to track and evaluate the performance of your business and not a chore or game to avoid paying tax. An accountant who permits questionable deductions will probably not be an asset as you strive to grow your business, and less of an asset when you begin negotiations with a purchaser.

Know Your Exit Options

“Hop on the bus, Gus. Drop off the key, Lee…… No need to discuss much”…… Just set yourself free.” Speaking in extremes, that Simon and Garfunkle tune from the 70’s could sum up a liquidation. This is a common exit option for the business owner who uses his business to support a fancy lifestyle, rather than reinvesting profits to develop a sound business with lasting value. There are at least three dozen exit options, but which one you chose depends on dozens of factors, maybe hundreds, in addition to your personal values, resources, goals, and the time you have allowed to implement an exit strategy. If family issues are part of the discussion, you will probably need extra time and more steps to insure a successful transition.

Money Isn’t Everything

No, but it’s essential to be able to make your wishes and dreams come true after you exit. How much cash you will need is an important piece of information. Without some detailed financial projections, including taxes and inflation, and an accurate estimate of business value, you will be like a ship without a rudder. Engage a comprehensive financial planner to prepare the numbers at least three years before you plan to exit. If the numbers don’t add up, now is the time to make needed changes or to change your course.

 

Joan M. Ridley is president of Business Wealth Solutions, a Dallas-based advisory firm that consults with business owners about how to successfully grow and leave their business. Visit our website at www.bwsllc.net. Call us today at 214.692.9192 for a complimentary meeting to learn how we can help you get where you want to go.

Copyright 2007 Joan M. Ridley