Planning an exit strategy from your small business is a lot like financially preparing for retirement; it simply isn’t something that should happen at the last minute. Succession planning requires just that — a plan, one that ideally has been an ongoing process that’s evolved as your business has grown and matured. A successful strategy will include long-term plans for you, your business, and your stakeholders as well as guidelines for handling unexpected contingencies.
I’ve helped dozens of business owners prepare for their eventual exits, and I know there’s no such thing as a one-size-fits-all template or approach. However, here are several standard questions that every business owner needs to answer as they think about how and when they’ll leave their business behind and start a new chapter of life.
Is there someone internally who can take over the business?
Depending on the size and type of business you own, you may have already identified someone with whom you’d be comfortable entrusting your business after you’re gone. Often this person is a member of your executive or management teams; sometimes it’s actually a family member. Your succession plan should include adequate time to select, train, and fully prepare that person for their eventual role as owner. This is usually a 12- to 36-month process, and it’s never too early to begin.
Although no one wants to think about their own demise, business owners should also have in place plans for short-term succession in the case of their unexpected death. This should be a person you trust to step in and assume the duties of business owner while long-term plans are being executed. This responsibility may fall to a spouse, child, partner, or a capable manager — anyone who you believe can seamlessly operate your business in the interim — or even for the long haul.
If there’s no obvious successor, should I sell or liquidate?
Parting with a business you’ve founded and/or grown isn’t easy, even when you’re burned out or yearning to retire. While the most popular option when exiting a business is to sell to either a previously-identified successor or to another business entity, some business owners instead resolve to shut their doors for good.
Deciding to liquidate a business involves both personal and professional considerations. For example, some owners feel there’s simply no one who could run the business to their standards. It’s also possible that the business is so specialized or depends so heavily on the owner’s talents or expertise that passing along the business to another person just isn’t feasible.
A liquidation plan should take into consideration the future of any employees, the sale of equipment and facilities, and providing sufficient notification to vendors, suppliers, and other entities with whom you’re associated to ensure that worrisome loose ends don’t spoil your post-ownership lifestyle.
What factors impact the selling price of my business?
Deciding on a selling price can take years — especially because business valuations should be based on free cash flow, not multiples of yearly sales volume as some may assume. In accounting parlance, EBITDA (earnings before interest, taxes, depreciation and amortization) plus the minimum amount of new capital expenditures (CAPEX) is a good measure of free cash flow, and it’s something astute buyers will want to know.
Therefore, as you’re looking ahead to exiting your business, you should also take a hard look at your past few years’ earnings and try to increase those earnings as fast as possible. While higher earnings might mean higher tax bills, this process will pay off in the long run.
What selling options do I have?
Once you’ve achieved a desired level of earnings and, therefore, the evaluation of the business, your next step is to decide if you’ll insist on a lump-sum buyout or if seller financing is an option.
Seller financing of at least a portion of the purchase price of a business happens more often than you think; many times it’s necessitated when a buyer has trouble securing third-party financing. Assuming the role of lender comes with both advantages and disadvantages, though. On the positive side, you might be able to complete a sale more quickly. You can usually garner a higher purchase price, and you’ll benefit from interest income, as well.
On the other hand, you also take on the risk that your buyer may default on the loan, which would land you right back into your current situation running the business. You can somewhat mitigate this risk by requiring a cash down payment (a good rule of thumb is about 30%). Sometimes partial financing by a seller actually enhances a buyer’s chance of financing the remainder with another lender.
Of course, financing your business for a buyer not only keeps you from making a clean break from your business, but also might tie up cash you’d rather use to invest in other businesses or personal opportunities.
Is there someone who can help me create my succession plan and exit strategy?
Even the most self-assured and experienced business owners sometimes need someone to serve as a sounding board or to provide a second opinion. As your Fractional CFO, I can help you walk through each of the steps of succession planning and help you decide how and when you can confidently walk away from your business. Give me a call at 256-318-8242 and let’s talk about planning your exit strategy!