Plan Your Exit Strategy
- Every intelligent business owner should have an exit strategy.
- An exit strategy is simply the means by which an entrepreneur or business owner will sell or liquidate their ownership interest in a business.
- In order to get the best possible purchase price with the least amount of risk, it is best to do some planning (or at least thinking) prior to listing and selling one’s business.
- A solid exit strategy should avoid common mistakes made by many business owners during the selling process.
- The overall goals of a business owner usually include protecting the confidentiality of the sale while maximizing the purchase price with the most favorable terms.
- Accomplishing these goals often involves avoiding mistakes or ‘unforced errors’ with the help off a professional business broker.
- Three common mistakes to avoid during the sales process are not having complete and accurate financials, overvaluing or undervaluing the business, and allowing one’s customers or employees to know about the sale prior to closing.
Mistake #1 Non-Transparent Financials
A business with clear and transparent financials often leads to a better valuation and purchase price. A business may have soaring and immense profits, but the financials must convey this in an understandable way to the buyer. Many business owners deal in cash, use personal expenses as ‘business expenses’, or simply do not have an organized set of financials. Most buyers of businesses which contain a large amount of goodwill often request the last 2-3 years of tax returns and/or profit and loss statements, along with an up to date financial statement for the current year. Without verification of the profits or adjusted owner benefit of the business, then a premium valuation is often difficult to obtain.
SBA Requires Clear Financials
Many buyers of businesses seek external funding backed by the Small Business Administration (SBA). Lenders always require a transparent set of financials in order to give an accurate appraisal. A fair appraisal only recognizes the reported profits of a business, which must be demonstrated by financials such as a tax returns. Without accurate and transparent financials, business sellers will not be able to sell to buyers seeking external funding. This in turn will affect the valuation of the business.
Mistake #2: Overvalue or Undervalue the Business
Many business owners make the mistake of overvaluing or undervaluing their business. It is imperative to trust a professional and trust the pricing of a business to an experienced business broker.
- Sellers can overvalue their business by not thinking about the buyer’s cost to replace themselves or their expertise.
- Sellers may use unrealistic or incorrect comparable sales prices of other businesses which may be misleading.
- Sellers do not have the experience of realizing how most buyers will value their business.
- Sellers may undervalue their business because they do not understand how much adjusted owner benefit – also known as Seller’s Discretionary Income – their business actually produces.
- Sellers may undervalue the business by underestimating how competitors may pay a premium for their business due to the power of synergies from integrating the two businesses.
- A properly valued business will result in a much quicker sale and will maximize the purchase price for the seller.
Mistake #3: Confidentiality Breached
A confidential sale for most business owners is a top priority. Virtually any business is subject to competitive pressures or has employees who will become frightened if they find out that the business is being sold. If word of the sale gets out, competitors will be more likely to steal customers or employees, suppliers may not give good vendor terms, and employees may become dissatisfied or even quit.
Prospective Buyers Must Sign NDA
The first and most important step to protect the confidentiality of a business sale is requiring any prospective buyers to sign a comprehensive Non-Disclosure Agreement (or NDA) prior to disclosing the actual identity of the business being sold. The NDA ensures that the prospective buyer may not approach the business owner or anyone associated with the business. It also requires that the prospective buyer not disclose the fact that the business is being sold to anyone else without the consent of the seller. It is important to remember that without qualifying themselves by signing the NDA and disclosing their liquid funds available to buy the business, prospective buyers should not be give confidential information about a business for sale.
Business Broker Ensures Confidentiality
It is almost impossible for a business owner to advertise their business themselves while still maintaining the confidentiality of the sale. An intermediary – such as a professional business broker – must be placed between the buyer and seller during the preliminary phase of the sales process. After all, someone must qualify prospective buyers other than the business owner himself or herself in order for confidentiality to be maintained. Further, the business owner does not want to waste time with prospects that can not afford to buy the business or can not get the proper financing. The business broker has the experience and expertise to financially qualify all prospective buyers.
Maximizing the purchase price of a business while minimizing risk of disruption requires the assistance of an experienced business broker. Maintaining accurate and up to date financial records, properly pricing the business, and selling the business confidentially are three steps to take that will reduce the most common mistakes made by many business owners when it comes time to sell their business.
Give Martin at Five Star Business Brokers of Palm Beach County a call today for a free evaluation for your business.