The last thing a small business owner wants to think about is an exit plan, but it’s something that needs to be considered ideally from day one.
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“On average 80% of a small business owner’s net worth is tied up in their business,” says Mark Tepper, president and founder of Strategic Wealth Partners. “According to the Chamber of Commerce only 20% of small businesses transfer successfully to another owner.”
With so much of a business owner’s money on the line, Tepper says it’s incumbent on the owner to take all the necessary steps to make the business saleable down the road.
Whether an exit means an outright sale or a transfer to a family member, here’s four steps to take to ensure your money is protected when it’s time to bid adieu to your business.
No. 1: Value your business.
The key ingredient to putting together an exit plan is figuring out what amount of money you would want to sell your business for, and then getting a market valuation of what your business is worth today. According to Greg Stevens, a certified financial planner at Cabot Money Management, it’s important that whoever values your business -- whether it’s an accountant, an investment bank or attorney -- has expertise valuing your specific niche since it will vary in different industries. Knowing what your business is worth and how much you would want in a sale will help you determine if your exit is realistic and doable.
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According to Tepper, getting it valued can also help you set goals in terms of revenue, since the more you make the more you’re likely to fetch when you do decide to sell. A small business that has less than $5 million in revenues will likely sell for less than a company that passes the $5 million mark, says Tepper.
“If your business is below that threshold you can grow revenue to get to that threshold,” he says. “That will immediately reduce the risk for any buyer looking at a small business.”
No. 2: Start planning your exit early on.
For most business owners the objective is to make money and grow. A benefit of that is being attractive to buyers, which is why Tepper says it’s important to build an investment for somebody else.
“No acquiring company wants to buy a job they want to buy a stand-alone company that can act as an investment,” says Tepper. He says it’s important to make the business independent of the owner and grow it with an eye toward selling some day. You can do that by developing a good management team and providing them with enough incentive to stay on board after you sell it.
How you make money also matters, at least to buyers. According to Tepper, the more recurring revenue the business has the better. “Investors are willing to pay more for recurring revenues,” he says.
No. 3: Document everything.
Nobody looking to buy a business wants to start from scratch, which is why you should document all systems and procedures. The most attractive businesses to buyers are those that are well oiled machines, says Tepper.
“The plans can’t be inside the owner’s head,” he says. “It has to be documented so someone else can pick up the books and continue running the company as is.”
No. 4: Consider taxes when thinking about selling.
If you are getting closer to a point where you think you want to sell your business, you’ll need to take taxes into consideration when determining the best time to sell, says Stevens.
Another tax strategy, particularly for small businesses with up to fifteen employees, is to make sure you’re fully funding the company’s retirement plan in the year you plan to sell, says Stevens.
“Pull as much cash as you can from the actual business…to try to shelter a good chunk from taxation,” he says.