For most small business owners, the business is their single largest asset and the one they are counting upon to fund their retirement. So wouldn’t it make sense for them to plan when and how they expect to exit the business? You would think so, but many don’t . . . at least not in a disciplined, structured way. They may have a vague notion in their head that they will sell the business for X dollars, but to whom? To an investor? To a competitor? To the employees? And how do they know they can get the price they want for the business? In many cases, they don’t know. There is often a disconnect between what the owner wants for the business and what the business is actually worth.
For example, the owner of the ABC Company has worked hard for many years to build his enterprise, and now he’s ready to put it up for sale. He already has visions of golf, fishing, traveling the world, and living out his days in comfort. But he is shocked when an offer from a prospective buyer comes in at half of what he counted on. He is further shocked when his advisors (lawyers and accountants) advise him that it is a good offer and he should take it. Everyone is sorry that the market price for the business isn’t what he hoped, but it is what it is. What’s he to do? Postpone retirement in hopes that he can get a better price later? Or proceed with the sale and scale back his retirement plans . . . fewer creature comforts, fewer rounds of golf, and less travel? Neither choice is very appealing, but the real sad part of the story is this: he didn’t have to be in this predicament if only he had done some intelligent exit planning.
First, understand who is the most likely buyer for your type of business. Then educate yourself about how that buyer will value your business. The buyer will, of course, be interested in any hard assets owned by the business . . . real estate, inventory, equipment, and the like. He will also be interested in profitability over the past three to five years. Have earnings been growing, flat, or in decline? He will be critically interested in cash flow, and he will want to know how well your people can keep the business moving when you are no longer there. All these factors enter into placing a value on your business, and depending on the industry, there are probably many other factors as well.
The point is, if you know how the various factors combine to place a value on your business, you can work to optimize those factors so as to maximize the value of the business. And you’ll know what those factors have to be to command the price you expect for your retirement.
It’s never too early to map out your exit strategy. If you’re not planning on exiting the business for 30 years, that’s great! That means you have plenty of time to work your plan and have it producing the results you want for your exit. Don’t wait. Do it now or you risk ending up like the ABC Company.