How Do I Sell My Business?

What is Exit Planning? Legacy Exit Planning

According to Wikipedia, Exit Planning is the process of preparation for the exit of an entrepreneur from his company while maximizing enterprise value , and thus his shareholder value, during the mergers and acquisitions transaction.   Other non-financial objectives may be pursued including the transition of the company to the next generation, sale to employees or management, or other altruistic, non-financial objectives.

In simple terms, exit planning is a three phase process undertaken by a business owner as he considers transferring ownership to another business or individual(s).

A variety of terms are used by professionals and entrepreneurs alike to describe exit planning.  They may include:  transition planning, exit strategy, and succession planning.  None of these terms define or encompass the full exit planning process.  Instead, each term is a phase or component of the exit planning process.

Let’s break down its three parts.

1. What is Transition Planning?

In the first phase of an exit plan, the entrepreneur initially devotes resources to improving the value of his business in the eyes of a prospective buyer or new owner.  It is logical to believe a prospective buyer or new owner will pay more for a business if it is profitable over time.  Accordingly, growing the business and increasing its profitability in the three-to-five years preceding its sale makes good financial sense.  Various measures of profitability are used in the transition planning process including: EBITDA, EBIT, and Enterprise Value.  These measures are also used when the business is sold or transferred to a new owner.

Proactively preparing the business for buyer’s due diligence during the sale process is also part of the transition planning process.  Likewise, taking steps to protect the relationships a business has with its customers, employees, and suppliers is necessary during the transition planning process.

A thorough transition plan for most businesses takes one-to-two years to accomplish.  In phase two of the exit planning process, the entrepreneur’s exit strategy should be developed.

2. What is Exit Strategy Planning?

In order to develop an exit strategy, the entrepreneur must consider his own personal objectives which may include financial goals, business culture, and/or matters of legacy.  Each entrepreneur wants to keep his exit promise on his own terms.  So the development of the entrepreneur’s exit strategy involves matching the “right fit’ new owner with these objectives.

There are a variety of paths to exit business ownership and they include:

  • Sale to a Third Party
  • Sale to Co-Shareholder, Partner or Co-Member
  • Sale or Transfer to Insiders or Management Buyout
  • ESOP – Employee Stock Ownership Plan
  • Sale or Transfer to Family Members
  • Investment from Venture Capital Firm
  • Investment from or Sale to Private Equity Firm
  • Investment from Angel Investor
  • Investment from Mezzanine – Convertible Debt and/or Equity
  • Bankruptcy
  • Liquidation

Each of the exit paths noted above have different tax consequences and all may be structured in a variety of ways.  Estate and tax planning is imperative during this phase of the exit planning process.

There are times when the entrepreneur’s personal and business objectives are at odds.  For example, if the entrepreneur wants the new owner to keep the business in its present location while receiving top dollar for its sale, discussions with an international buyer willing to pay a higher price and with intentions of plant relocation would not be a ‘right fit’.  In this example, the top dollar sales price objective conflicts with the desire to keep the business in the same town post sale.

The development of various exit strategy scenarios allows an entrepreneur to begin thinking realistically about   potential buyers or new owners in the context of his personal objectives, before the selling process commences.  This effort saves precious time and resources when the business ultimately is put up for sale or is transferred.

3. What is Succession Planning?

This third, and very important phase in the exit planning process, addresses the need to replace any owners and/or management team members who may exit the business after the sale or transfer occurs.  Succession planning is vital for the longevity and long term financial success of the buyer.  Replacing executive-level talent is not as simple as hiring new employees.  In many cases, the business’ owners and executives hold extensive knowledge and, without proper succession planning and its careful execution, the business may ultimately fail.

Exit Planning FAQ’s

When Should I Develop My Exit Plan?

As odd as this may sound, you should begin your exit plan when you start your business.  The first part of the exit planning process involves growing a profitable business that would be attractive to potential buyers or new owners.  Growing a profitable business from day one means you are always in a position to exit your business.  Likewise, developing business habits that make your business due diligence proof and protect your valuable business relationships contribute to having a healthy business.

Having said that, if the exit plan has not been started a three-to-five year period is an ideal time frame to start the exit planning process to sell or transfer to a new owner.

How Do I Know I am Ready to Exit my Business?

You don’t know.  And that’s the problem.  Exiting a business may not be optional.  You may suffer an accident or debilitating illness and be forced to exit.  There’s no time like the present to begin the exit planning process. 

Who Do I Need to Create my Exit Plan and What Do They Do?

Just as It Takes a Village to Sell a Business, it takes various resources to create and sustain an exit plan.  A few of the resources needed include:

  • Business Transaction Attorney – to offer advice regarding tax and estate planning matters and to prepare critical documents
  • Certified Public Accountant – to calculate business tax basis, prepare financial and tax projections
  • Financial Planner – to prepare cash flow projections for personal budget/needs post sale or transfer
  • C.F.O – to assist with business budgeting, projections, and financial reporting
  • Exit Planner – to educate, guide and facilitate the Transition Planning phase to develop the Exit Strategies to  develop a Succession Planning Roadmap that keeps all of the above professionals heading in the same direction!

Brokers vs. Bankers

Before we define the Steps in the Sale of a Business, it’s important to understand the options an entrepreneur has with respect to representation in the selling process. The size of the business dictates whether it’s appropriate to hire a Business Broker, or alternatively, an Investment Banker, also referred to as a Merger & Acquisition Intermediary.

Business Brokers

Business Brokers typically represent smaller businesses known as Main Street Businesses.  Such businesses typically have less than $2 Million revenue per year.  Business Brokers often specialize in industries such as restaurants, specific franchises, service industries, etc.  The best way to find a good business broker is to reach out to other entrepreneurs in the same industry who have successfully sold their businesses and ask for a referral.

Investment Bankers

Investment Bankers, or   M&A Intermediaries, typically represent middle market businesses and tend to have a very large footprint and a deep network of resources.  A good Investment Banking firm has the ability to pull in specialists in any industry from multiple geographical locations to market and close a transaction.

Do It Yourself is also an option for the entrepreneur who wants to sell his business.  Although an option, representing yourself in the sale of your business is widely regarded by many as foolish and is not recommended.  Not recommended for good reasons.  According to Smith Bucklin and Associates through a Study commissioned by the M&A Source and the IBBA:

  • 60% of sellers received an increased price of over 40% by using an intermediary;
  • 10% received 90% more money for their business;
  • 20% received 60% more money for their business;
  • 30% received 40% more money for their business;
  • 90% of sellers using an intermediary felt that their involvement resulted in a more confidential sales process; and
  • 90% of sellers using an intermediary felt that their involvement resulted in significantly reduced stress.

How Much are Business Broker’s and Investment Banker’s Fees?

Entrepreneurs ask this question often because the model for paying a business broker or investment banker is not commonly understood.  The model is referred to as the Double Lehman Formula or the Double Lehman Scale and looks something like this:

  • A Commission or Success Fee is paid at closing.
  • 10% of the first $1,000,000 selling price; plus
  • 8% of the next $1,000,000 selling price; plus
  • 6% of the next $1,000,000 selling price; plus
  • 4% of the next $1,000,000 selling price; plus
  • 2% of the selling price exceeding $4,000,000.

Main Street businesses often sell for less than $1,000,000.  For this reason, many business brokers charge their clients a flat 10% commission to represent them in the sale of their business.

When the entrepreneur is selling a business through an investment banker or an M&A intermediary, a retainer fee and out-of-pocket expenses are normally paid to the representative by the entrepreneur from the initial engagement until the sale closing.  The retainer is normally deducted from the final success fee at the closing.

 

Steps to Sell a Business

Once an entrepreneur has completed the exit planning process, hired an experienced Business Broker or Investment Banker, they are ready to take the steps to sell a business.  The most important thing an entrepreneur can do during the selling process is to understand the importance of confidentiality and to respect the leading role of their Business Broker or Investment Banker.  To use a football analogy, these professionals should be the offensive front line for the entrepreneur so that the he may continue to operate his business and maintain the confidentiality related to the sale of their business.  If the entrepreneur allows their representative to do their job, the business will continue running profitably and they will experience less stress while the business is on the market for sale.

We’ve found many entrepreneurs do not take the exit planning journey before they sell their business.  Instead, their journey to sell their business starts with an unsolicited offer to acquire their business.  

What Do I Need to Sell My Business?

This question about what is needed to complete the sale of a business is also a common one from entrepreneurs.  If properly represented by advisors who place the entrepreneur’s best interests first, the process of gathering all of the resources necessary to complete the sale should be no problem at all.

We’ve identified the resources needed to sell a business in this Infographic.

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Holly Magister ExitPromise Founder
Holly Magister is the founder of ExitPromise where she helps entrepreneurs start, grow, and in some cases sell or transfer their businesses to new owners. As a Certified Financial Planner and CPA, Holly built ExitPromise.com to bring more than three decades of business experience, learning and know-how to the 28 million small business owners across America. Continue Reading...
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