Planning Ahead for the Day You Sell Your Business
By Darrell Lopp
Whether you plan to sell your business a year from nowor 20 years from now, an exit planwill keep you on track toward achieving your goals.” Your exit plan starts by determining your ultimate goal for your business. Is it a legacy, or a means to an end? If you are like most business owners, you probably hope to sell the business someday to fund your retirement. If this is your goal, then your first step in creating your plan is to determine how much you will need for retirement. The answer is not always clear and you may want to consult with a financial planner. I t is often said that the best time for a business owner to create an exit plan is either the day they start their business, or today. In other words, it’s never too soon to start planning for the day you sell your business. Whether you plan to sell your business a year from now or 20 years from now, an exit plan will keep you on track toward achieving your goals. Unfortunately, many business owners don’t see the need for an exit plan or take the time to create one. They are too busy dealing with the daily grind of running their business to worry about life outside of their business. Ideally, they should focus as much energy on maximizing the value of their business as they do on running their business. These activities are not mutually exclusive, however, operating a profitable business while demonstrating solid sales growth will also help maximize its value. Any business broker will tell you that debt, divorce, and death are never good reasons to sell a business. If an unfortunate event occurs and there is no exit plan in place, the business may be forced to liquidate for less than asset value. Having an exit plan in place, however, will help provide options as circumstances change.
Do you know what your business is worth? While other factors play a part, such as the condition of the equipment, location, market, client base, history and longevity, the true value of your business is based on its profitability. An approximate value of your business can be calculated as a multiple of earnings (EBITDA + SDE). When seeking to maximize valuation, you should focus on factors that are within your control. Maximizing the contribution margin, either through increasing gross sales or minimizing variable costs, will make a significant impact on your profitability. Other ways to positively affect the value of your business include keeping updated and accurate financials, operating according to Rainbow International® systems and procedures, minimizing debt and properly maintaining vehicles and equipment. Since most transactions involve an SBA guaranteed loan, which requires a seller note for a portion of the total transaction, you should expect some seller financing in order to close a deal. Regardless of the structure of the transaction, you should be prepared to provide the bank with a minimum of three years of financials along with tax returns. The bank will do their own valuation based on the financials that you provide. This means, in essence, that the bank will be the true arbiter of the business valuation. This is why it is so critical to have updated financials and accurate tax returns. Whether you plan to sell your business to fund retirement, pass it on as a legacy, or just move on to something else, an exit plan should be a part of your overall business strategy for success. Think of business ownership as a journey. Financial statements are like your GPS showing your current position, your long- term business goal is your destination, and your exit plan is the roadmap to show you the way. Start today by creating your exit plan and chart your course to achieve your goals.
STORMSURGE TM | E1:2017 21
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