Prepare an exit strategy that meets personal goals

  • Follow Your Business

Benjamin Franklin said, "In this world nothing can be said to be certain, except death and taxes." It can also be said with certainty that every business owner will eventually leave his or her company. The only question is, will it be standing up or lying down? Either way, preparing a business exit strategy that meets your personal goals is critical.

One of the viable "standing up" exit strategy options you consider should be selling your business.

If you decide to sell your company, there are important steps you can take to prepare the business for sale. Following them will help facilitate the transaction and maximize the selling price.

CLEAN UP YOUR INCOME STATEMENT: Small business owners typically prepare financial records for the purpose of income tax reporting. For that reason, the owner will try to minimize the profitability of the business, thereby limiting their tax liability. This allows the business owner to keep more of their hard earned money. Unfortunately, this strategy can be at odds with potential buyers and their financing sources, such as commercial lenders . They prefer to see the maximum amount of profit on the bottom line. Companies with clean income statements, which maximize profitability, generally sell for a premium over those that have a lot of the business owner's personal expenses "added back" to the profit.

If you want to maximize the purchase price for your company, then you must get all of your personal, or unnecessary, business expenses out of the financials. You should review all other expenses and see if they are really necessary for the business to operate. Removal of these expenses will increase your taxes, but for each dollar you gain in profit, you can expect to add three to five times in the purchase price a buyer will pay for the company, maybe even more.

By cleaning up your income statement prior to a sale, you will facilitate the buyer being able to obtain financing. The lender will be looking to the business as the primary repayment source for their loan. Showing the lender "clean" financials greatly enhance the likelihood that the lender will finance the transaction.

CLEAN UP THE BALANCE SHEET: Sell, donate or trash outdated or unsellable inventory. Turn it into cash or a tax deduction right now. A potential buyer probably won't buy it anyway, and by having it on the financials it will call into question the good inventory he or she is buying. .

Convert your loans from shareholders or stockholder notes into bank debt -- or pay them off. Loans from shareholders are generally seen not as a loan to the company, but as a cost of capital. They will almost always consider your loans as paid in equity and not really a loan. There is a chance a buyer might assume, or pay for, some bank debt as part of the purchase price. However, a buyer will almost never assume a stockholder or owner note.

CLEAN UP THE FACILITY: Take some time and go through your facility. Clean it up the best that you can. Once you have done this, have someone you trust walk through the facility and tell you what they think. Get someone who has "fresh eyes" to give you an honest assessment of what your facility looks like and then do the things that they recommend to enhance the look to an outsider.

GET AN INDEPENDENT THIRD-PARTY BUSINESS APPRAISAL: The most important reason to purchase the business appraisal is for you. Someone who has no stake, one way or the other, in the outcome of the appraisal must perform this for you. The reason you have to do this is because you need to know what the business is really worth. Armed with that knowledge, you can make intelligent and rock-solid decisions.

If you sell the business for the appraised price or higher, that's great. You will be able to sleep at night knowing you haven't left any money on the table.

In some cases, you may choose to sell for less than the appraised value; however, in doing so you will be informed and have full knowledge of what you are doing.

REVIEW YOUR LEASES AND OTHER CONTRACTS: If you are in a leased facility, the landlord may be able to kill your deal. Read your lease. Most require the landlord's consent to agreement or subletting. Hopefully, the assignment section says something like: "this lease will not be assigned or subject without the consent of the landlord and such consent will not be unreasonably withheld." Unfortunately, we have been seeing more and more leases where the landlord can withhold this consent for any reason. If your lease says this, you're better off knowing prior to sale so you can decide how to handle the lease issues with the landlord.

HAVE A MEETING WITH YOUR ADVISers : The CPA, attorney and broker are your team. Let them know what you are planning so a strategy can be developed to take the business to market. Keeping everyone on board fosters cooperation between your advisers and ensures they all work together to help you achieve your goals.

If everyone is working for you, you should have a sale process that will maximize the sale price, create a structure that minimizes your tax from the sale, and reduce your ongoing legal liability part of sale.

DAVID YEZBAK IS THE OWNER OF SUNBELT BUSINESS BROKERS IN AIKEN.


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