As every business owner knows, there’s an endless stream of challenges and conflicts that can and often do arise during the life of the business. Business planning is the art and science of helping businesses at all stages of their life cycles, from the formation of new businesses to operating existing businesses to planning for the next generation – and even exiting the business by way of a sale.
Exit planning assists you in strategically packaging your company to increase its appeal, value, and ability to support a higher purchase price and favorable terms.
Lots of things go into how the price and terms are set. Legal, financial, information, execution, and so on. The video covers a number of them:
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Today, we’re talking about exit planning. It’s a relatively new area of focus. There’s people who get credentialed just in this area. But let’s just talk about it at a high level. What does it mean? And why should you care?
So exit planning, as the name suggests, is a term of art for selling your business. So you’ve worked really hard. You’ve created something of value. Congratulations. The statistics are certainly not in your favor. Most businesses fail. Nine out of 10 businesses fail in the first five years. And of those that don’t fail, nine out of 10 of those fail in the next 10 years. So if you’re talking about selling your business, congratulations.
That is really an achievement you should be proud of. Now, when it comes to selling your business, there’s brokers, business brokers that will try to sell your business for you. They get a commission. They’re like realtors of real estate, but for businesses. Some are good, some are not.
Lawyers have mixed feelings about brokers because sometimes brokers try to play lawyer and they don’t do a very good job. You really should have a business lawyer on your team whenever you’re talking about selling your business. I don’t care if you have a broker or not. You should have a lawyer that knows what they’re doing. And so when you’re selling your business, there’s brokers, there’s non brokers, it doesn’t matter.
Exit planning is a concept that is talking about helping to package your business shiny and nice to make it more valuable, more appealing, more attractive, and therefore, justify a higher purchase price and more favorable terms. In that respect, there’s an old saying that I love: you set the price, I’ll set the terms. And once you go through a few of these, you’ll understand that the price may not be the end all be all of the transaction. So exit planning is making sure that the business is packaged well, looks pretty, is attractive, garners the highest price, and the most favorable terms.
So let’s break it down. Packaging, what does that mean? Well, if I’m a buyer of your business, I want to see your legal, your corporate structure, your formation documents. I want to see your operating agreements, your partnership agreements, your buy sales, shareholders agreements, buy laws. I want to see your customer agreements, which we talked about. I want to see who your customers are. I want to see your contractors, your employees, your agreements with all these parties. Pretty much every contract that you have, I want to see it. And if you don’t have it, well, then your price just goes down and your terms become less favorable.
So that’s legal. Obviously, you’ll do a diligent search of cases that are pending and litigation and stuff like that. But generally speaking, legal is very important to look at to make sure everything is buttoned up tight. You want to make sure that your employees have contracts, that they have protections in there. That way, when you buy the business, ideally, you have the team staying with you because they’re under contract. You don’t want to buy a business and all the employees leave and you’re scrambling to keep this business alive. That’s not good. So legal is important. Making sure everything is documented is important.
Next, financial. What does the business look like under the hood? How do the books look? Are there books? If there’s no books, lower purchase price, less favorable terms. Are the books in order? Are they clean? They make sense? Are there discrepancies? Are there things there that are going to raise eyebrows? What does this come from? Why is this here? Is it going to open the door to questions? Are there audited financial statements? If it’s a big enough company, there might be audited financial statements, which is like a third party auditor audits the financial statements that the company had prepared. Are there banking relationships? Are there bank notes? Are there security interests, guarantees? These types of things are important in doing your due diligence. There’s the legal, there’s the financial. When you’re talking about buying a business, you need to make sure you’re doing your due diligence. And we’ll talk about that in another video.
The next thing I would want to be aware of and be very aware of would be information. What information do you have? Do you have a database of all your customers, your products, your transactions? Are you able to market to these people or these businesses? If you have a database of a million customers and all their information, all their transaction histories, that’s much more valuable than not having that or having 12, a list of 12, because now you can’t remarket to those million people.
You’re going to almost build the business from scratch. So it’s just a difference in purchase price and favorability of terms. They keep going back to those same points. Everything is all about price and terms.
So organization and information is important. Is there a team in place? What’s the executive team look like? Do you have people that know what they’re doing? Do you have an IT person? Do you have an executor? Do you have a financial person, a legal person? You got to look at the team. It’s very important. Not because maybe they’re staying on or maybe they aren’t, but just to know what you’re getting.
And then staying on leads us to talk about, generally, when you buy a business, the executive team will stay on for a year or two as a contractor or employee to transition the business and try to get as many customers to stay and make sure the business is transitioning properly. And there’s documentation that goes along with that. I would say the last thing I would want to mention would just be intellectual property. What intellectual property? What assets are there? Is it trademarks, copyright, software, domains, customer information, databases?
Is it trucks? Is it land? Is it business? Is it buildings? Is it inventory? You just have to be very mindful of all the things that go into a business and do your diligence to make sure that it’s in order.
Now, in the next video, I’m going to talk about some of the general terms that you might see in a sale of a business. And as I’ve alluded to before, it’s like a sliding scale, more shiny and attractive, better price, better terms. And here’s where that comes into play. So with that, check out the free business planning stress test. It’s in the description below. And thank you for stopping by and stay tuned for more.
When Should You Consider a Sale?
Many people use their estate planning to form a succession plan for their business, but there may be times this isn’t warranted. You may want to consider making the sale of your business part of your planning if one of these things is true:
- You have no legal heirs or living relatives to pass the business on to
- Your beneficiaries or heirs have no interest in running your business after you are gone or no one who is interested has the expertise, experience, or skills to successfully manage it
- The vision you have for your business requires it to be operated by a third party or someone with expertise in the industry who you’ve already identified – and they are not in your family
- The money your family will require to live after you pass away exceeds the income generated from the business and selling the business would help to sustain them more appropriately
- You have financial obligations or claims by creditors that will require the business to be sold in order to pay
- The valuation for your business is at its height and you don’t want to take the risk of having stock or assets sold at a later time when the valuation may not be so high
Maximizing Your Business’s Value
At the tail-end of a successful business, founders often want to maintain their cash flow, downshift their involvement, and ultimately – but thoughtfully – transition ownership and control of the business to the next generation, whether that’s family or third parties like key personnel.
In either case, we help with that business succession plan by working with key professionals like CPAs and financial advisors in order to ensure all bases are covered. Lastly, at any time there’s a purchase or sale of the business or assets of the business, we provide advice and counsel regarding that transaction from start to finish, including drafting, reviewing, and negotiating terms and agreements as well engaging in due diligence.
Bottom line? It’s important to do your homework and take the time to thoughtfully engage in exit planning. That way you’re maximizing the price and the most favorable terms you can get for your business.
Contact us to get started today!