By Yazi Jepson , October 24, 2016
Many business owners experience various issues during the course of operating their business and decide to sell rather than continue on. The problem with this is most owners haven’t taken the time to develop a feasible exit strategy. There are many options to developing a profitable exit strategy, but they all start with knowing what the financial state of your business is right now. This is important because you will need to use your financial records as part of your negotiating strategy and to determine what you could use as leverage.
Deciding If Selling Is the Right Option
Most owners fear that their business has too many problems to sell it. As a result, they rarely come up with good solutions or options to successfully exit out of the business. Some of the major problems that businesses face include: too much debt, high frequency of cash shortages; weak management team; and/or outdated assets.
However, does the business owner actually want to sell or is it that he/she’d rather just be profitable? Business owners want out of their business for several reasons, but to sell the business because it’s not profitable may not be what the owner actually wants. The better solution would be to make the business profitable by implementing a great exit strategy.
Solutions to Common Issues Found Prior to Selling
One of the major areas that prevent business owners from addressing typical problems in their business is not knowing where they stand. The best way to determine this is to a) maintain current updated financial records and b) determine the value of your business.
Most buyers and accountants will evaluate your debt ratio and use it to determine how much of your assets are available to pay down the debt. To that end, business owners should have an understanding of their overall debt ratio and the debt-to-income ratio, which lets buyers know how much your monthly debt payments are. This number is then divided by your gross monthly income. It typically allows bankers and others key professionals to measure what your ability is to pay your bills on a monthly basis, including any outstanding loans that you may have. If the business is sold to a buyer and the debt is not paid down, he/she will consider the debt-to-income ratio when coming up with an offer price.
Apart from having updated financial records that reflect your business’ current financial state, you also need to know what your business is worth. This is usually done through a process called a business valuation. It places an economic value on the business that reflects its current position as well as its future value. Most buyers will not even consider purchasing a business until they know what it is worth now and what it will be worth in the foreseeable future. Buyers will use this information to determine an offer price.
The following areas can be used as leverage when determining what price to sell your business for.
- Physical assets (inventory and operating equipment)
- Accounts receivables
- Patents, copyrights and intellectual property
- Improvements to various software systems, old equipment and other areas that improve operations
- Outstanding management team
- Established strategic alliances and JV partnerships
But First, Exit Strategy
Exit Planning Team
To come up with a well-thought-out exit strategy, form an exit planning team that is experienced with structuring deals, particularly deals that involve exit strategies for business owners that will prove to be mutually beneficial for all parties involved. The exit plan should include increasing the overall net worth of the business, among other factors.
Bringing on an Investor
Rather than selling the business outright, you could consider bringing on an investor who could take on part ownership to help get it to a profitable, healthy state. Typically, investors not only bring investment dollars, but they also bring expertise to the table. They work with others who are capable of improving the performance of the business.
You could also offer a buyout as part of the exit strategy. What this means is that you could bring an investor on board for a certain period of time and, after the business is functioning at its maximum performance and is profitable, you could buy the investor out. This could be done by providing him/her with his/her initial principal investment, plus his/her ROI of 3 to 5% above prime, plus an additional flat amount for his/her efforts, such as 20% of the previous year’s profits. As an alternative, you could even make the investor a partner where he/she’d have part ownership in the business, offer a monthly salary, then offer to repay the initial investment, plus ROI after the business has been profitable for 3 to 5 years.
This strategy allows you to keep the business (if that’s what you want), while improving its performance with the assistance of the investor. However, if you are set on selling the business, you’ll have to work hard to highlight its previous financial performance and the future profitability of the business – also highlighting its worth.
There is no denying that selling your business is one of the most important decisions you have to make in your life. It is very essential you carefully consider and examine everything. Make sure that you are ready and well-prepared for any prospect that might come knocking on your door at any time. Try to spot problems facing your business and work back from there. The considerations and strategies described above should be a “starter kit” for you to walk in the right path toward higher profits.