Preparing Your Exit Strategy: Start NOW and Plan It!

Preparing Your Small Business Exit Strategy: Start NOW and Plan It!

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The Exit Strategy for a Small Business
Starts As Soon As Possible

by Therese Reger

If you have a business, you've probably heard the term 'exit strategy'. No, this doesn't refer to your last will and testament. Rather, it's long-term thinking about how your involvement with your business will end.

Ideally, most business owners would like to build equity and cash out eventually. This raises some issues: Will this business be worth something to someone besides me? What will constitute the assets? What is the minimum size that is considered salable?

First, can you show a profit? It's a truism that nobody will pay for potential. You may see only blue skies ahead, but you will need a track record of earnings and profits before a buyer will agree to plunk down cash for it.

Some businesses' only real asset is the owner. If, for instance, you've built a nice little income from doing magic shows, good luck selling out. Once the magician - that would be you - disappears, poof! The business evaporates.

That may be a fanciful example, but it holds true for sole proprietorships such as one-person accounting firms, or landscape designers. Unless you can assure a buyer that your customers will be as loyal to him or her as they have been to you, you don't have a salable property.

The time to start exit planning is the day you start your business, says Jay Polimeno, CBI, a business broker in North Woodstock, N.H. [ www.polimenobusinesssales.com ]

"A business owner needs to prepare years in advance," says Polimeno. He ticks off some items to be considered in the planning process:

Active marketing and sales to build the business

Creating an employee culture which will easily transfer to a new owner

Accurate accounting of revenues and expenses so that everything can be justified to a potential buyer

Acquisition of real estate assets if possible or at least a very solid lease if your business is renting space

A full understanding of Seller's Discretionary Earnings - i.e., the 'cash flow' of the business to the owner

Last and more personally, an idea of what the business owner will do once the business is sold: sign a non-compete and retire? continue to work for the new buyer? open up another business? spend time with the kids or grandkids?

Selling is not the only possibility. You may decide early on that you would like to leave the business to your kids. (Better make sure they agree with that idea!) Or you may conclude there's more value in liquidation. Creative thinking is in order. If you own a widget factory on a hilltop, you may want to approach a real estate developer.

Successful selling usually also means getting out while the going is good. Don't wait until the economy or changes in technology gives you a string of bad quarters. While you may not want to sell when things are going great guns, that is the prime time to polish the business and put it on the market. Another advantage to selling during good times: A buyer is more likely to find lenders. And since most buyers do not approach you with their hands full of cash, the availability of financing will determine how much you can get in a sale.

Ultimately, you have only so much control over the fate of your business. But it pays to start the planning process before you start feeling pressure to sell. In that case, the phrase 'exit strategy' will tend to take on shades of terminal despair.

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