If you own a business, you may have at some point thought about the day when you’re ready to move on from it and into the next stage of your life or career. Whether you’ve put serious thought into selling or not, it is always good to have an exit strategy. Having an exit strategy doesn’t necessarily mean that you’re ready to sell. It’s just planning for an unpredictable future. Nobody wants to sell to get out of a bad situation. Be prepared to get out of a good one and you’ll be prepared for anything. Review these common ways an owner can sell a business and put yourself in the best situation for selling your company, whether it’s now or later.
This type of sale would involve selling a business to someone the owner knows, such as an acquaintance, employee, friend or family member. This makes it essentially an internal sale. A friendly buyout could also mean selling the company to someone who recently approached the owner and expressed interest in buying. This type of sale could feel safe, because you feel good about handing it over to someone you know, so there’s less due diligence and more confidence that the business will continue to be run as-is. However, owners executing a friendly buyout generally get less money from the sale of the business because the relationship they have with the buyer compels them to discount it. Owners in this situation are also putting more confidence in the fact that they know the person buying the business, rather than the buyer’s experience level and ability to run the business.
This type of sale involves a partial sale of company assets or a complete liquidation in multiple stages. In a divestiture, the process is generally easier because you don’t have to worry about negotiating or transferring control of the company, but you get nowhere near the true value of your company in return. Intangible assets such as reputation, client lists and goodwill value can add a lot to the value of a business, and liquidating wastes the opportunity to cash in on them. If you decide to liquidate you must also be aware that any money you make from selling assets must be used to pay creditors.
Draining it Dry
In this type of exit strategy, the owner takes all of the business profits out and leaving very little for operating income or capitalization. They pay themselves a large salary instead of reinvesting money in the business. If you own a company without shareholders or investors, you can get away with ‘draining it dry’ without really upsetting anyone, and can just pull the money out when you need it. However, without reinvesting in the company, you are also stalling its growth, and could potentially hurt the company down the road. This could lead to higher tax rates for the individual owner, the potential of breaking leases or operating agreements, and could actually ‘kill’ the business before the owner is ready to exit.
If you’re looking to get the highest possible return, selling your business on the open market is the best option. This method has many benefits, but can be very complicated, so it’s best not to do it alone and to be well represented. Conducting the sale with the help of an experienced business broker will ensure that no details are left out. A business broker will value your business based on a number of different factors, including industry-specific considerations, tangibles and intangibles. They have a large network of buyer leads and the marketing expertise to help you find a qualified group or individual to purchase your business. Business brokers also help keep the details of your business and the sale confidential, acting as a barrier for you, protecting sensitive information that might harm your business from getting out. They do all of the heavy lifting and negotiating for you, so that you can continue to run your business and keep it profitable.
With all of the time and money business owners invest in their companies, it is important that they get a fair return on their investment when it comes time to sell. It’s never too early to plan your exit strategy. Ideally, it should be planned from the very start of the company. While many business owners don’t plan that far ahead, more preparation will help make the transition much when you decide to move on from your investment. As you are planning your strategy, be sure to keep your business running strong and try to add value in the process. This will help make your company more attractive to buyers and put the most amount of money back in your pocket.
If you are contemplating your exit strategy and would like to discover the benefits of using a business broker to help sell a company you own, contact CIBB today to start with a free business valuation estimate.