Summary
When you started your business, you probably had a few questions about forming a corporation or LLC, what do you need to do to make sure you are collecting (and paying) taxes, and what, if any licensing you to need to operate. Maybe you engaged a lawyer or a CPA or used online services such as LegalZoom or Zen Business or did this yourself.
When it comes to successful exit your business, you may face the same uncertainty on the steps you need to take. Where to start, what to do, who to turn to for help? This article will help you understand some of the most important questions to answer so you can set goals for a successful exit.
When Do I Plan To Exit?
This is probably the most important question to ask. Planning ahead can help make the process less stressful and maximize your return. In fact, starting the planning process a year or more in advance allows you to assess where the business is today and implement changes that can increase the value of your business.
Setting a date is helpful, either a specific month or quarter in the future, (June of 2022 or Q2 2022) allows you to work backward in preparation for successful exit. Knowing a transaction can take a few weeks (estimate at least 30 days) and that it may take a few weeks for a buyer to move through due diligence means you will want to start organizing financials and documentation months in advance. The more preparation you do upfront, the better the chances you can move quickly through the transitional phase. So, when do you think you want to exit?
What Is My Business Worth?
Every business owner starts with the same question, what is my business worth? Yes, selling at a great price is ideal and a goal for most business owners. Hopefully what you want for your business and what your business is actually worth are close to the same number. Placing a value on a business does not have to cost thousands of dollars and if you are just starting to explore your options, an estimate based on some of your basic financial information will suffice. The goal is to have a sense of the value versus a formal business valuation for prospective buyers to review during due diligence.
One simple way to estimate the potential value is to look at the proceeds or earnings a new owner can expect to receive from the business. This is known as Seller’s Discretionary Earnings which is commonly used for placing a value on businesses with less than $5M in revenue also known as Main Street Businesses. You can learn more about different approaches to valuing a business in our free Guides that are part of ExitGuide basic plan as well as in our Resource Center.
So how do you calculate a simple estimate? One way is to take your salary or earning, the amount you take out of the business, using an average of the last 3 to 4 years is a good idea. You’ll also want to include some discretionary expenses such as a car lease, club memberships, and other perks that are not part of daily operating expenses.
Typically a multiple is applied to this number, that multiple can vary depending on a number of factors including industry and location. For our example, let’s use a multiple of 1.3 applied to the discretionary earnings.
Owner’s salary $75,000 annual
Car lease $3,600 annual
Bonus $2,500 annual
Total of $81,100 x 1.3 = $105,430
Now this number does not include things such as assets, cash on hand, and other additional value into the business. Once you add those in, it can provide a rough estimate of the potential value. Again, this is not a formal valuation but it can give you an idea of what the business could be worth.
Can I Sell My Business?
Practically speaking, not every business that wants to sell is going to find a buyer or a buyer at the desired price. You have worked hard to start and build your business that may have provided employment to others, value to customers, and been a part of your local community. It is worth something and it means something to you and others. No one can take that away from you.
Selling a business means a buyer will take on the business entity including assets and liabilities and continue running the business. In many cases, proceeds from the business will be used to pay the seller over a period of time, maybe a few years. This means a new owner has to believe the business can generate enough net income (profit) to pay themselves and the agreed-to installments for the business. If your business generates less than $3 million in annual revenue, it is very likely the buyer will come from your local community or even a current employee. Creating a list of prospective buyers can be a good exercise to understand the feasibility of attracting a buyer. In addition to being interested, you will want to think about other important factors such as their ability to effectively run the business, can they finance a transaction, how will employees and customers react. If you can come up with a list of qualified people, you may be in a position to sell the business when you are ready.
A successful exit can take many forms, marketing and selling to a buyer, selling to an employee or business partner, selling assets, and dissolving the business can be a positive outcome for most owners. Taking the time to think through what you are seeking, your timeline for exiting, and some practical assumptions allows you to set clear and actionable goals and develop a plan to meet those goals.