It may be time to get out of the business. Maybe you’ve made enough money, or maybe you’re just tired. Maybe you’d like to build a different business. Whatever your motivation, you’d like to pursue this new path while you still have your health and ambition. You need a business exit strategy.
If the business is a good one, you may want to see it survive. Rather than selling it off to the highest bidder, you may prefer to “keep it in the family” and pass the business to your children or another relative, or sell to an employee.
Many entrepreneurs dream of passing their business on to the next generation. Unfortunately, family succession usually does not succeed. It’s been reported that 70% of family businesses do not survive the transition from the founder to the second generation.
Family rivalries and other dysfunction often intrude to derail the business. The founder refuses to cede control. Founder/parent installs his favorite child as the leader, who is unsuitable for the role. The next generation leader and managers are poor decision-makers. The sibling denied the role of chief executive feuds with the chosen one.
Founder/parent must take carefully considered steps to create the conditions for second generation success to occur. It will be important to distinguish between company leader, managers and owners and make certain that no one feels devalued. It will be incumbent upon the founder/parent to preserve not only the business, but also family relationships and remember that family gatherings ought to be happy occasions that all family members want to attend.
If you’d like to pass the business along to family members, start by asking them if they’d like to become the second generation of owners. If any or all agree to that proposal, then consult a family business specialist to help with the process.
The ability to groom your hand-picked successor is a wonderful thing and recruiting a specialist to help you choose the candidate who is best qualified to assume the reins will go a long way toward ensuring next generation business success. Check with the graduate management program of a local college or university to find out if a family business specialist is available to help with the transition and follow-up family business coaching.
Sell to employees
If no family members are interested in owning and running the business, you may find that one, or several, of your employees may be interested in buying you out. Don’t be shy about raising that possibility. What better way to boost confidence and morale than letting valuable employees know that you trust them enough to place your treasured achievement into their capable and caring hands?
Selling to employees can be a great exit strategy. The employees will be able to invest in a business that they know and trust. They know the challenges and opportunities that the business may encounter. They know the customers and the customers know them. They have institutional memory and know how things run.
Encourage employees whom you know would make successful business owners to consider a buy-out proposal or an employee stock option plan (ESOP)? Call your business attorney and/or accountant and make sure that you have the best legal structure for the exit strategy that you select.
Exiting the business
If the business has tangible assets and healthy sales, your exit strategy can provide for you either a retirement nest egg or start-up capital to create yet another business. Keep your options open and start the preparations early.
Maintain detailed and credible financial records: demonstrate profitability; show good cash flow; keep your debt to equity ratio low. Expect to show a prospective buyer or your family members 5 years of data. If the business owns property and/or equipment, ensure that all is in good working order.
To sell your business for a price that accurately reflects its value, speak first with your accountant and business attorney, next with a business valuation expert or appraiser and then with a business broker. Your accountant or attorney may also know the right buyer for your business.
An accurate appraisal is a must-have when planning to exit your business. There are three methods to explore:
I. Asset Valuation. The value of the inventory and equipment, business property, the client list and even the company’s reputation.
II. Industry Valuation. Based on the sale prices of similar businesses in your industry and geographic locale.
III. Cash-flow Valuation. Based on the expected future cash flow of the company, as demonstrated by past performance.
Remember that the best time to sell your business is when both you and it are healthy!
Thanks for reading,
Kim L. Clark is a business strategy and marketing consultant who works with for-profit and not-for-profit organization leaders who must achieve business goals. She is the founder and principal of the consulting firm Polished Professionals Boston and she teaches business plan writing to aspiring entrepreneurs. Learn how Kim’s expertise can benefit your organization when you visit http://polishedprofessionalsboston.com.