2020 was a challenging year all around, and like many, your business probably felt some impact from world events. I’m not suggesting that you exit your business due to the events of 2020 (unless that is your plan), what I am suggesting is that if you don’t have a business exit plan, it’s time to get one. If 2020 taught us anything, it was that it’s good to be prepared. You simply never know what can happen.
When I sold my first company, I didn’t have an exit plan. Not even close. I was a go-go, young business owner and it wasn’t on my radar to sell. Along came some big-name companies interested in buying my business, and the thought of being purchased by a big brand was enticing and, frankly, a little flattering. Suddenly selling my business seemed like the right thing to do.
After months of negotiation, due diligence, and anxiety, I signed over the business I had spent years building. As I drove away from the signing meeting, I was sick to my stomach. I wasn’t ready to get out of the business, and it was too late to turn back. As I reflected years later, I understood that the reason I ended up selling before I was ready was that I never stopped to ask myself, “Why are you doing this?”
As a business owner, you know that you will have to exit your business at some point. What are your options?
- Shut it down and liquidate?
- Transfer ownership to family or partners?
- Sell to the first buyer that shows interest?
- Pass away (hope not!)?
If you don’t have an exit plan, you won’t know what direction to choose or have any insight into your business’s readiness to sell. Or if you are maximizing the value of the company, like me, you’ll find yourself sick to your stomach and wondering what the heck you just did and why?
A Business Road Map
Think of an exit plan as a business road map, the route that leads you to exiting your business without regrets. Specifically, an exit plan:
- Keeps you from jumping at the first offer that comes along (which may not be in your best interest)
- Provides a growth compass to ensure your business is in top shape to achieve the best outcome (cultural and financial)
- Gives you negotiation points for finding the right buyer (why you’re selling, what you’re selling, and when you want to sell)
- Provides you with a personal perspective on the most important factors when you finally sell (Is this sale good for my customers? My employees? My family? Me?)
An exit plan walks you through uncertainties of a sale before they happen, like:
- What if you’re preparing to sell and an acquisition opportunity arises? Do you move forward with it? Would it be additive or just a distraction? Would an acquisition net a larger sale in the future?
- What if you end up selling sooner than expected due to health issues? Do you have a succession plan in place
- Selling a business without an exit strategy is like running a marathon without a finish line. Without one, you’ll never know where you are headed.
Can You Answer These Four Easy Questions?
An exit plan won’t tell you how to sell your business, but it should tell you why you’re selling your business, what elements of the sale are negotiable, when you plan to sell, and what elements you won’t negotiate on.
Here’s what you should ask yourself:
- Why are you selling your business? (dig deep here)
- What elements of the sale are negotiable? (how much is the company worth; will you stay on after the sale)
- When do you want to sell (it takes on average 8 to 12 months to sell a business, so factor that into your timeline)?
- What points won’t you negotiate (for example: public vs. private buyer, can’t relocate the business, other)?
Take the time to reflect and honestly answer these four questions and get on track to getting a meaningful exit plan in place. I say meaningful because we’ve found that selling their business for most of the business owners we work with is not just about the financial gain. The emotions that surface during the selling process are often surprising. Unless they’ve taken some time to reflect on what is and isn’t important, the emotions can get in the way of the deal.
Asking the right questions may help you avoid these three mistakes.
Regardless of where you are in your business’s growth, an exit plan should be more than just a financial roadmap to maximize sale proceeds. It should also get you to stop and look at the reasons why, what you want from the sale, what you won’t negotiate on, and your timeline.
One: If you don’t know why you want to sell, you may sell your business and as soon as that non-compete expires you take your hard-earned proceeds and start a new business nearly identical to your old one. Now you’re competing with your old company!
That scenario is riddled with integrity issues, buyer and seller regrets, and many other headaches. There’s no point in going through the work of selling one business just to start the same type of business when you could have kept the original company and grown it.
Two: You take those same hard-earned proceeds and, on a whim, start a business in an unrelated industry and end up losing a lot of money. Again, if you didn’t know why you wanted to sell and decided to keep working after the sale, you could end up making a bad investment.
Three: If you sell your company and agree to stay on (which could be part of the financial agreement), there’s a chance the transition to the buyer’s company may be painful. You could end up quitting with a sour taste from the transaction and maybe even forfeiting some of your sale proceeds.
Regardless of where you are in your business’s growth, an exit plan should be more than just a financial roadmap to maximize sale proceeds. It should also get you to stop and look at the reasons why, what you want from the sale, what you won’t negotiate on, and your timeline. Understanding your why, what, when, and won’t will pay dividends, not only financially but also emotionally. No hard-working business owner wants to walk away from the sale of their life’s work feeling sick and to wonder why the heck they just sold.
This blog was contributed by Paradise Capital. Paradise Capital helps small to mid-size business owners plan to grow and exit their business emotionally and financially strong. Learn more about exit planning by watching Choice Bank’s free on-demand Taking Care of Business Webinar. Register here.