Once you’re ready to sell your business, it’s important to create an actionable strategy for exiting. This can help you avoid costly mistakes and frustrations during the selling process and ensure a smooth hand-off to the new owner. In this chapter we will walk you through how to develop an effective exit strategy.
What is a Business Exit Strategy?
An effective exit strategy works to maximize the value of the sale of your business. Having a documented strategy in place is the best way to get top dollar for your company, find the right buyer, and ensure a clean transition.
Use the following information as a guide when building your business exit strategy checklist:
1. Determine a Method of Exiting
It’s important to understand you have exit options beyond selling your business to a new owner who will actively take over running operations or to complete an asset sale. Some other options include merging with another company, acquisition by a larger company, an IPO, or dissolving the company.
2. Pre-Sale Clean Up
Just as when you’re selling a house, the way to get the most value from the sale of your business is to do some pre-sale clean up. You know you have a valuable business, but you need buyers to see it as a good investment. Also, going through the process of a pre-sale clean up helps you to anticipate any issues or questions that could come up during the sales process. Before you list your business, take time to review these items:
- Legal. Ensure that any and all legal issues have been wrapped up before you attempt to sell your business. This includes questions about ownership, updating all licenses, reviewing all contracts the company has engaged in, and larger issues like pending lawsuits or serious complaints from vendors or employees.
- Financial. Having healthy financials will undoubtedly impact the sale of your business, especially depending on the type of valuation you plan utilize. Start by organizing and updating your financial statements, collect on current receivables, and take any possible steps to improve your business’s cash flow.
- Marketing. The ability to sell your business and tell the story of why it’s great is important for getting top dollar when selling. Make sure your image is as shiny as possible by addressing any negative reviews and updating your website. Even if you’re close to listing your business for sale, attending industry events can be a great way to spread positive word-of-mouth about your business and meet potential buyers. Even though it can feel counter-intuitive, do not disengage. Instead, ramp up efforts to improve your business image.
- Hand-off. Can your business still succeed when you’re not the one running it? Take steps to set up the future owner for success by nurturing client relationships, documenting organizational processes and procedures, and ensuring vendor contracts can be transferred.
3. Choose an Asking Price
Once you’ve taken the necessary steps to prepare your business for a sale, it’s time to land on an asking price. This can be an emotional process for business owners because what you feel the value of your business is compared to an asking price that will attract buyers may not align (although, thankfully, in many cases it does!).
One place to start choosing an asking price is to determine what level of valuation to obtain. Unlike a business appraisal, business valuations are quick and relatively inexpensive but still provide detailed information about the value of your business. They often include multiple ‘approaches,’ which paint of picture of how your business is valued using different information from your financial statements.
For detailed information about valuing your business and how to effectively pick an asking price, see How to Value Your Business.
4. Decide How and Where to Sell Your Business
In your search for the right buyer for your business, you’ll first need to decide where and how to sell your business. There are many options available, all with varying investments of both time and money.
Many sellers turn to a business broker when they don’t they have the time to properly market their business, prefer to focus on other things, or want to make sure the deal is done quickly. An experienced business broker will utilize their network and expertise to market your business where it’s most likely to be sold and connect with potential buyers. They can also help you determine an equitable asking price.
For those who don’t want the cost investment of a business broker, which can run about 10 percent of the total sale price, there are many options for posting the sale of your business online. Whether it’s a platform specific to buying and selling or a more general listing site such as Craigslist, there are options for just about every business niche and price point.
To learn more about where and how to sell your business, see How to Find a Buyer for Your Business.
5. Create a Customer Communication Plan
Though selling your business is an exciting time, it’s important to hold off on updating external stakeholders until the deal is essentially complete. This is because it would cause unnecessary confusion to let customers know you’re selling the business only to recant if the deal falls through.
However, once the sale is final, it’s important to have a plan in place to effectively communicate to clients and customers and to create the foundation for a smooth transition to the new owner. Here are a few tips to keep in mind to effectively communicate the sale of your business:
- Coordinate timing and messaging with the new owner, your employees, and anyone who may be asked questions. Customers will likely feel more secure with the change if everyone is on the same page.
- Update your long-term and enterprise customers first to ensure you address all of their concerns.
- Always focus on the positive when addressing the transition in emails, phone calls, and on your website. Let customers know you’re grateful for the relationship with them, and they have something exciting to look forward to.
- Make information about the transition accessible by creating easily-found FAQs.
6. Tax Considerations
As you work through the steps of your exit strategy, it’s always prudent to consult a tax professional (either CPA or tax attorney) to ensure you’re taking the proper steps in the eyes of the IRS. This is especially true if your company sponsors a 401(k) plan for your employees — you need to work with your CPA, third party provider, and investment management provider to ensure that all filings are completed.
Having an actionable business exit strategy in place is the best way to keep focused during the exciting yet somewhat stressful time of selling a business. Create a plan that you and your team can stick to and ensure a successful transition.