Preparing to Sell Your Business: How to Get Started With a Successful Exit Strategy

By Jay Halverson Business & Estate Planning Specialist, First Republic Securities Company
July 1, 2019

If you are a business owner, one thing is certain: At some point, you will exit your company.  In order to leave – on your terms and when the time is right – you should begin to design your plan now in order to achieve a successful outcome.

According to the U.S. Census Bureau’s most recent Survey of Business Owners, in 2012, 75% of U.S. businesses with paid employees were owned by individuals ages 45 and older; many of these business owners are Baby Boomers set to transition over the next 10 to 15 years. A study by the Exit Planning Institute shows that only 20% to 30% of businesses that go to market actually sell, leaving up to 80% without solid options to harvest their wealth and ensure economic continuity into the next generation. An owner who is “ready” with an attractive business greatly increases the odds that the business will survive a transition. The question is, how ready are business owners?

Many owners often believe that their exit plan begins when they receive an offer for their business. That should not be the case. The key to a successful transition is to start as early as possible and to seek help as you navigate the process.  There are endless details to keep track of during exit, succession and transition planning and it can become a second job. The #1 trap to avoid is losing focus on running your company. Finding the right advisor to guide you through the pre-event planning experience is a critical first step in maximizing the opportunity to achieve your goals.

In addition to seeking outside guidance there are additional steps that any business owner contemplating a change should consider:

Begin to prepare yourself emotionally

Business owners are often told to set their emotions aside when thinking through an exit.

While this may be true when it’s time to get into the weeds of closing a transaction, it’s critical to think through the emotional and personal aspects of a sale early in the process. For most business owners, selling a company isn’t just about getting the best financial terms; it’s also about separating themselves from what has, in many cases, been the focus of their lives for years.

With that in mind, we encourage business owners to think about an exit initially in terms of how it will change their daily personal life and routines.  Some of the key questions we ask our clients include: What are your biggest strengths, talents and passions? What keeps you up at night? What’s left on your personal and professional bucket list? What is the single biggest opportunity in your life right now – and how does selling your company strengthen or detract from that?

For some owners, a sale doesn’t just offer a financial return; it can also open doors for them to pursue other passions. For others, running their company is their passion. Wherever you fit, considering how your business impacts your personal life is the cornerstone of the entire planning experience.

Know your “go home” number

Odds are that your business is your most valuable asset and makes up a significant part of your wealth. While it’s paramount to be realistic about what your company is worth, it is equally important to identify your “go home” number – what it would take to walk away from your business (after taxes and other costs) and never have to work again.

Prior to an exit,  business owners should go through an interactive cash flow modeling experience that not only provides analysis around a potential transaction, but incorporates it in the context of their broader goals around spending, saving and investing. Cash flow modeling provides a visual representation of a financial plan – from current income needs to estate planning and legacy goals. Most owners we have worked with comment that this is the most eye-opening step in the exit process.

The earlier you are able to pinpoint your “go home” number, the more options and control you will have as you explore if an exit is right for you. There are instances where a company’s current valuation far exceeds what an owner needs to achieve his or her objectives, but it’s often the case that it does not. Fortunately, business owners who take time to understand the distinction between what they need and what they would get if they sold their company today are afforded time to reconcile the two.

As you begin to think through the financial implications of a sale, don’t underestimate the value of your “cookie jar” – the benefits that come with owning a business, which include everything from company credit cards and medical coverage to cell phone plans or vehicle perks for you and your family.  Putting a value on these perks as if the company was not around to provide them is sometimes the difference between selling or not.  

The second most overlooked aspect is taxes. Tax implications of a sale may be one of the single biggest drivers around the structure and timing of a deal; you’ll want to make sure your team of advisers includes professionals who can identify creative solutions to minimize the tax burden and to identify possible tax traps. 

When all is said and done, your “go home” number may not match your company’s current valuation, as is often the case in the early stages of a sale. The good news is that by going through this process early you will have options, both in terms of what you can do to make your business more valuable and how to make your personal financial needs line up.

Understand what makes your business valuable – and know how to articulate it

The number one rule in determining whether or not you're ready to sell is whether that business can operate without you for an extended period of time, because if it can't, it's not going to have much value if you aren’t around. Some of the most valuable companies that buyers are looking for are the ones that don’t need an owner to stick around to run it every day.

Being able to articulate the value drivers in your business is a key step in the exit planning process. Value drivers are a company's secret sauce and can have a real impact on driving up valuation multiples. Value drivers can vary greatly by industry and company – from intellectual property to customer concentration to brand recognition to a motivated management team – and owners need to identify these early on and understand what makes them important to a potential buyer.

Think about how to articulate what those value drivers are and why they distinguish you from your competitor down the street. Practice telling your story and get comfortable with it; if you choose to head down the exit path, you will be telling it a lot. 

Make exit planning a priority – but not a distraction

There is a big difference between creating a plan and executing a plan. Countless owners have plans just sitting in their filing cabinet collecting dust.  One of the biggest challenges owners face is balancing the strategic planning needed to work toward a successful exit while still running their businesses day to day at what is often a critical time. Many owners fall into the “working in your business” trap – they get so tangled in the day-to-day issues of running their business they never have time to come up for air and address the big-picture priorities.  Often this can lead to both the business and the exit planning not receiving adequate attention. 

To balance the demands of running a business and potentially transitioning out of it, consider adopting some of these best practices.

  • Carve out strategic time for exit planning – just as you would for any other big project – while staying focused on running and growing the business.
  • Enlist an “exit planning architect” who can help you map out a timeline, work through key steps and stay on task. Let them help you initially identify your desired exit options, create a written plan and manage the task list that the attorneys, CPAs, investment bankers and wealth managers will need to complete.
  • Get your corporate documents in order. Would-be buyers will want to see clean and up-to-date corporate documentation: be proactive about this to avoid the risk of delaying or derailing a deal.
  • When it’s time, bring key employees into the conversation. They will need to stay beyond the close. Work with your advisors to craft the right communication strategy and incentivize your employees to stay well beyond the finish line, not just to it. 

Exit planning is a journey. If done correctly, it will ensure you have the following: an exploration of all the options, a written plan identifying your wishes, a contingency plan for the “what if’s” and a task list for your advisory team. Finding the right exit planning advisor will increase the chances of your vision coming true.  

The strategies mentioned in this article may have tax and legal consequences; therefore, you should consult your own attorneys and/or tax advisors to understand the consequences of any strategies mentioned in this document. The information has been verified by the author, but it does not constitute legal or tax advice and First Republic is not acting as your attorney or tax advisor. We make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained here. This information is governed by our Terms and Conditions of Use.