Archive for the ‘Business Exit Strategy’ Category

The essence of any for profit business enterprise is to generate a positive net cash flow over time from business operations for the benefit of the owner or owners.

If the above would be considered the primary goal, then the secondary goal would be to increase the businesses ability to produce more profits and cash flow over time.  The more consistently the business can produce positive returns, the more valuable the underlying business is to others.

Ultimately, the strength of the businesses ability to create profits, value, and cash flow is the essence of any profitable and successful Business Exit Strategy.

The most successful business exits will occur when the market is most interested in what the business has to offer and the business itself has demonstrated a strong business model that has taken advantage of the opportunity in the market.

So while the best business exit strategies have a lot to do with a point in time or the right timing when market opportunity and business performance come together, most business exit strategies are more focused on how to sell the business or liquidate the business assets at the retirement age of the business owners.

The odds that this selected point of exit is going to create optional or even above average results is slim.

There are two main reasons for this.

I’ve already talked about the first reason and that being the timing of  peak market interest will exist when it exists.  While it may be possible in some situations to create the demand for the business during the owner preferred time period, its more likely that larger market forces in play like the state of competition and customer demand at any point in time will significantly determine the potential success of a business sale.

The second reason is that at the point of business sale, the business is not properly set up for sale.  There are a number of things that go into getting a business into a sale-able position.  Financial statements need to show solid business returns and hopefully growth over the last 3 to 5 year period.  The financial statements need to be prepared under a higher level of review than most businesses would typically undertake.  There needs to be systems in place that will allow others to believe they can take over the business without a large risk of business transition failure.  Core staff and management will not only need to be trained and committed to the ongoing business, but also be prepared to continue on in the event of business sale.   Basically, the business needs to clearly demonstrate its value to interested parties through clear and acceptable representation of all critical aspects of the business including marketing, operation, and financial structure.

So when should you start planning your business exit strategy?

If you haven’t already started, right now is a good time, especially if you have any interest in having a successful and profitable business exit.

For an optimal business sale, the business needs to always be in a sales position to take advantage of the opportunities as they arise.

For those businesses where the business owner is committed to exit at a certain time period in the future, its perhaps even more important to create and maintain a sell-able position versus scrambling to make the business look more appealing near the end of the owner’s working life.  Once a state of business decay creeps into a company, it can take a tremendous amount of business capital and effort to return the operations to an optimal level of performance and repair.

Click Here To Speak With Business Financing Specialist Brent Finlay

Technorati Tags: business exit plan, Business Exit Strategy, planning business exit, planning business sale, selling a business, selling your business

Have You Though Through How Potential Buyers Will Finance Your Business In Your Exit Strategy?

So your in the process of selling your business or planning for a business sale in the future as part of your exit strategy.

As you go through the process of getting your business ready for sale, take some time to consider how you can assist potential buyers with their purchase.

While cash sales do occur, most purchases of business assets or shares require financing against the assets and/or shares to be acquired.

If business financing can’t be arranged, the deal will not close and you’re going to have a harder time completing the sale process.

Yes, all business financing applications are unique and draw into consideration a number of factors outside of the business being purchased.  But regardless of the profile of the borrower, if the underlying business acquisition can’t secure financing, there won’t be a deal.

Going one step further, its not unusual that in addition to third party debt or equity acquisition financing, vendor financing may also be required.  Especially in cases where the purchase price contains a portion of goodwill (which is likely in most transactions involving a going concern business operating at a profit), the vendor is expected by many third party capital sources to provide some of the overall financing requirements.

As a vendor, there are two important things to take note of.

First, how much acquisition financing would the historical financial performance of the business, asset value, and present state of being attract from third party lenders and investors?

Second, how much vendor financing is the vendor comfortable providing and under what terms?

In response to the first question, if the business has focused on lowering it’s tax position in recent years and the owner has creatively taken money out of the business, lowering the retained earnings in the process, there may not be as much borrowing power as one might think.  Lenders and investors are going to look at the financial performance of the business over a 3 to 5 year period to ascertain the amount of debt the business can manage.   Recasting of numbers aside to allow for creative accounting and tax reduction strategies, the historical financial performance may not support the type of leverage the buyer expects against the purchase price.

Vendor’s that take this into consideration and create a Business Financing picture over recent history (3 to 5  years) that supports higher leverage will not only sell their business faster, but also come closer to getting their target sale price.

This is where the second question comes in.  If less acquisition financing is available than expected, the vendor has to either reduce the purchase price or provide more vendor financing.

Too often in deal negotiations, the vendor will provide very rigid vendor financing terms and conditions that are designed to reduce the vendor’s risk, and not the risk of anyone else.  And there are other risks.  For the buyer, if the vendor financing repayment terms are too aggressive, the buyer could risk giving the business back to the vendor it repayment falls short.  For a third party lender or investor, the cash flow stress of an accelerated vendor repayment plan could jeopardize the long term health of the business.

The reality is that any financing package will need to cover off the risks of all parties and that’s unlikely to happen when the vendor provides take it or leave it terms for a vendor financing component before third party acquisition financing is even figured out.

Basically, it comes down to the vendor helping the buyer buy the business.

Acquisition financing can be hard to pin down for some of the very reasons alluded to above.  If the vendor wants to reduce or eliminate the need for vendor financing, then he or she needs to make sure the business being sold can generate as high a level of leverage as possible.

If vendor financing is required, its likely going to have to be coordinated with the third party financing in terms of security positions and debt repayment schedules.

The key takeaway here is that the vendor has tremendous influence over buyer financing which will be the key in a successful purchase and sale transaction in most situations.

Technorati Tags: involve both

The Exit Strategy That Keeps Your Bags Packed

One of the many challenges in creating a viable exit strategy for selling off your business interests is how to determine the timing.

Its one thing to say you want to work until your 55 and then sell the business, but it could be quite another to actually have a motivated buyer show up willing to pay your price.

So I propose the evergreen exit strategy whereby the business is always up for sale in a figurative sense i.e. there is no permanent for sale sign sticking out of the lawn or hanging from the side of the building.

With an evergreen exit plan, the business owner has developed the mind set that he or she cannot control when the best time is to sell, so they have to focus on what they can control, which is making sure everything in the business is up to date and supportive of a potential sale, and making sure that the day to day actions of the business are directed towards increasing the overall value of the business.

This mind set is not easy to develop as many business owners are more locked into the thinking that they will sell at retirement, period.

But an evergreen mind set always allows for the ability to consider and react to any opportunities that may arise at any time.

Think of it this way.  If you’re 10 years away from your expected time of exit and a highly motivated buyer comes along for some reason and wants to offer you considerably more for your business than even you think its worth, would you not want to seriously consider any potential offers that interested party is prepared to make?

Even if you develop the proper mindset, there’s still some work that needs to be done to allow you to even seriously consider opportunities that may arise.

First, the business must maintain what I call a “sell-able” state of being.  There has to be a continual effort to make sure that the financial statements are up to date, that all equipment and facilities are in a good state of repair, that regulatory issues or legal issues are dealt with quickly and not left to linger, that employee, customer, and supplier contracts are up to date, that the business has developed sufficient management depth to allow profitable operations to continue once the owner is gone, and so on.

If your business can’t stand up to the due diligence process of the prospective buyer and his or her advisers, then any opportunity that does materialize may just as quickly pass you buy.

Second, the business owner(s) has to be prepared to look at any opportunities quickly as motivated buyers don’t tend to stand still very long and could very well move on to the next best option.

Following this strategy also doesn’t require you to do anything if you don’t want to, or don’t feel the benefit is sufficient to sell.  What it does do is allow you to be as opportunistic as you want to be.

Over a period of 10 to 30 years, the future is going to be very hard to predict.  So when opportunity comes knocking, it may very well be worth opening the door and seeing what’s on the other side.

Technorati Tags: Business Exit Strategy, Business Finance, exit plan, exit strategy, selling a business

When Selling A Business, Which Comes First, The Deal Or The Dough?

Its late Friday afternoon and I’m getting a bit cute with my terminology.   When I speak of dough here I mean the financing required to complete a business acquisition.  When I speak of the deal, I’m talking about the purchase and sale agreement between the buyer and the seller.

One of the key reasons that business acquisition financing can be so tough to secure is because of the which comes first dilemma.

From the buyer and seller points of view, if they have a basic letter of intent signed up between them, then the assumption is that financing should be able to be secured before proceeding further.

From a prospective lender or investor point of view, until there is a binding purchase and sale agreement in place, there will not likely be a commitment for financing issued due to the fact that the source of financing a) doesn’t want to complete all its due diligence before an actual deal is binding and b) doesn’t know exactly what they’re financing until the final agreed upon terms and conditions of purchase and sale are known.

The buyer doesn’t want to spend money on due diligence unless he/she knows they can get financing.  The buyer and seller together don’t want to pay their lawyers to hammer out an agreement of sale without knowing if the financing will work out.

The lender doesn’t want to commit time and resources to assessing the financing application until there is a completed deal.

In many cases, the deal goes nowhere as nobody wants to go first.

From the lender or investors point of view, I clearly understand where they are coming from.  Yes, they can initially screen the deal and provide a term sheet outlining what they could potentially do if an agreement for sale was finalized and all the related due diligence supported a positive financing decision.

But to expect a commitment to fund prior to full review and the completion of a purchase and sale agreement is a tad bit unrealistic.

The resulting stand off goes nowhere and the deal is called off.

So how do you avoid destroying a perfectly good deal that, like most deals, requires some amount of outside financing?

First and foremost, its up to the buyer and seller to get comfortable with 1) the buyer’s ability to finance the deal and 2) the acquiring business’ ability to support and repay a financing facility.

Short of getting a commitment or even a straight answer from a prospective lender or investor, the next best thing is to talk to a Business Financing specialist and get a third party opinion of the likelihood that financing can be arranged.

If the buyer and seller don’t want to take this step, then they can commence to try and bang out a purchase and sale agreement and make it conditional on financing, pay their lawyers for their time, and hope it all works out.

The key here is that the onus is on both the buyer and seller to work together to get the deal done.   Even if a lender were to go first, there could still be gaps in the financing requirements that need to be filled by a combination of the buyer and the seller, so their ongoing collaboration is going to be essential to create a win/win scenario that isn’t going to cost them an arm and a leg to figure out.

Technorati Tags: Business Financing, selling a business

Here’s Some Suggestions On Selling A Business You May Want To Consider

Regardless of the size of a business for sale, there are similar elements that need to be covered off.  As the size and related complexity of the business grows, there will be more service providers interested in providing you with services to aid the process.

Lets face it, when business sales get into the millions of dollars, there will be cash available to pay for fees, so more service providers throw their hats into the ring to potentially become one of your advisers.

There are the obvious advisers such as your accountant and lawyer, but there are also business valuation experts to help establish the sales price, business optimization experts to help increase the value of the business prior to sale, taxation specialist that can help with more complex tax savings strategies that may be beyond the expertise of your own accountant, business brokers who put your business up for sale and market your business to buyers, financing specialists that advise you how to make the business more finance-able for the buyer, investment consultants that want to help you optimize the future value of the proceeds you get out of the business, and so on and so on.

These various services can each be provided by a specialist or sometimes one individual can fulfill multiple roles.  There are also merger and acquisition firms that bring all the pieces together so its more of a one stop shop to consider.

If you spend any amount of time talking to all these experts, you’re head will start spinning from the multitude of issues they raise leaving you wondering how anyone successfully sells their business without losing their mind in the process.

Here are some survival tips to consider when selling a business.

First, its always good to start at the beginning.  Evaluate your existing advisers to see how they stack up to the challenge ahead.  Just because you’ve had the same lawyer or accountant for 20 years doesn’t mean they can provide the level of service you require for this very specialized and sometimes complex transaction.

Lawyers and accountants all specialize in different areas.  If your lawyer and accountant do not specialize or at least have significant experience helping their clients sell businesses, then you’re going to have to find individuals that do.  Many times people have a comfort level and confidence level in certain individuals and want them to assist regardless of the need.  I can only say that I definitely don’t want a foot specialist to perform open heart surgery on me and the same type of logic applies to the specialties and abilities of your key advisers.

Here’s another way of looking at it.  If you engage someone to help you that is not well versed in all the ins and outs of a sale transaction, you’re likely going to have an adviser who is going to take an ultra conservative approach in order not to risk making a mistake.  When selling a business, you need advisers who are skilled at working through all sorts of issues that can arise.  There is definitely an art of the deal and you want to be working with deal makers, not people who have great intentions without the requisite experience.  Remember that if the deal falls apart one time or many, they are still going to send you a bill for all the time they spend.  So make sure you’re investing in someone that really knows what their doing with respect to selling a business.

Existing advisers tend to have networks of other professionals that can lend a hand in areas they are not focused on.  So even if they are not themselves the best resource for you, they could very well lead you to a qualified referral that you can have some confidence in versus starting from scratch.

You may also want to consider working with a business consultant or firm that specializes in business sales support.  After all, selling a business is a project management exercise, so unless you’re planning to project manage all aspects yourself, you are going to need some help covering off all the key areas that can kill the deal or destroy value for you.

The use of advisers should be looked at as an investment whereby whatever you pay out for help will provide you with a solid return from the money you get to keep from the sale.   So every adviser or service you consider should be able to clearly show you how an investment in their efforts will provide you with a positive return.

If what they offer cannot be easily quantified into real value in simple terms, then pass.  Valued advisers understand that they must provide you with a return on your investment to them.  Unfortunately, many of these service providers don’t have this mindset, so you’re going to have to weed out the ones that don’t so you’re not wasting time and money.

Remember that having a good team will not only get your business sold faster, but also increase what you put in your pockets.

By starting with the selection process, and putting in the effort towards drafting the right players for your team, you will greatly increase your probability of a successful sales process.

Technorati Tags: Sell A Business, selling a busines

How To Increase The Chances Of A Business Sale Being Completed

I’ve been on a roll lately talking about business acquisition financing and many of the things that need to be considered to secure this hard to pin down form of financing.

Even if Business Financing is not required and the buyer can pay in cash, there is still no guarantee the deal will be finalized, although its going to be significantly easier to close without having to worry about securing capital.

So putting sources of funds aside, what is the key to closing the purchase and sale of the shares or assets of an existing business?

In all the deals I have been involved in or observed, I can easily come up with what I believe is the #1 key to success, and that is for the buyer and seller to jointly project manage the deal to its successful completion.

While that may seem a tad obvious to some, here is a better way to describe what I’m trying to say.

The Buyer And Seller Have To Become Blood Brothers.

There I said it.  As corny as that may sound, its the best way I can describe not only how important their interaction is with each other, but also the degree of comfort and trust that needs to develop between them during the buy/sell process.

Once the Letter of Intent is signed, they need to get out the hunting knives, draw out a little blood on their palms, and bond the deal.

What this ritual symbolizes is the understanding that has now been forged between the two parties which can be summarized as follows:

• Unless there are unforeseen issues or disclosures that materially impact the deal, both sides are committed to do what it takes to complete the process.
• Both the buyer and seller will retain the decision making power throughout the deal.
• Both buyer and seller agree to discuss the outstanding issues on a regular basis and get involved where necessary to assure progress is being made.

Putting aside issues related to financing or unforeseen events and disclosures, deals fall apart because there are too many cooks brewing the stew.

Both sides will have advisers such as accountants, lawyers, financial advisers, business consultants, insurance agents, etc.  The larger the team, the less likely the deal will close without the buyer and seller staying engaged in the process.

Both sides will likely have to deal with a certain number of outside parties dictated by the composition of the deal.  This can include licensing agencies, bonding companies, appraisers, environmental consultants, suppliers, customers, employees, unions, and so on and so on.  As the number goes up, probability of success goes down.

In essence, the buyer and seller need to project manage their deal to completion.  Too often one or both sides do not appreciate what this can entail and the result is the deal can get away from them.

By definition, a project manager understands all the tasks required, how they inter relate, any interdependency among tasks or events, time lines, and so on.  Unfortunately for many deals, buyer, seller or both do not get very involved after the initial negotiations have been completed and if anything tend to step back and let the advisers take over.

Aside from project management, both sides also need to remain the decision makers.  Deals tend to have a certain amount of twists and turns as the details get pounded out.  With every curve in the road, there may require an adjustment or compromise on one side or the other.  Advisers can be very good at providing their opinions for issue resolution, but their advise may also end up killing the deal.

As decision makers, the buyer and seller need to receive all valid input regarding various issues and decide if any particular issue is something that can be worked through or an outright deal breaker.

A good example of this is during the drafting of purchase and sale agreements.  Each side’s lawyer’s job is to protect their client and get them the best deal possible.  When the lawyers from both sides are taking a win/lose approach, trying to out due the other side with clever clauses and demands, the deal tends to go back and forth until the eventual impasse is created.

Its at this point where the buyer and seller have to look at the areas of disagreement, consider all advise, and make their own decision as to how an issue or issues will be resolved.

I’ve seen sellers overly disconnected with the process through up their hands and say, “I’m not a lawyer, so if my lawyer says it has to be this way or that, I have to go along with what he says”, basically making the lawyer the decision maker.

A blood brother to the deal would seriously consider what their lawyer has to say, talk to the other side if appropriate as well as other advisers that could add value to the situation, and then make their own decision whether to proceed or not.

If buyer or seller agrees to proceed against an adviser’s advise, the adviser involved must then find a way to make the deal work (be a deal maker) in keeping with the wishes of the person paying their bill.

This is one of the more common points where deals blow up, but there can be many others.  As the number of people involved goes up, so do the levels of inaccuracies and misunderstandings that occur not to mention the lengthening of time lines.

And remember, most if not all the advisers are getting paid whether the deal gets done or not, so it truly is in both the buyer’s and seller’s interests to stay on top of what’s going on.

Obviously no amount of involvement can guarantee success, but the odds are greatly increased when the coordination of the overall project details are being well managed, the misunderstandings are kept to a minimum, and the advisers are directed to find ways to make the deal work versus blowing it up.

Technorati Tags: Business Financing, Buy A Business, Sell A Business

How To Know When To Cash Out

Every business will change ownership someday.  Some will have internal family succession plans while others will just decide one day to place the business up for sale.

But when is the best time to sell a business?

If you follow some of the investment bankers and business brokerage firms, they will speak to the M&A cycle, and where its at, at any point in time.

The basis of the M&A cycle is that over a period of time, buyers are more actively interested in acquiring businesses and business assets than at other times.  Factors that feed into the formation of an actual cycle are available capital, the economic landscape, market potential in different industries and so on.

While there is definitely a pattern to overall M&A activity, it also becomes a selling tool for M&A firms, brokers, and consultants, all  in the business of making money from buy/sell transactions.

The is also the more traditional approach to simply building your business year over year until you reach retirement age and then, at that point, if there is no internal or family succession, then sell your business interest in the open market.

Personally, I subscribe to a third approach…

Sell your business when someone wants to buy it for a fair or inflated price.

Under this approach, your business is always for sale whether you’ve been operating for 20 months or 20 years. By being open to this possibility, there may be more opportunities to consider over time than you may have thought possible.

The rationale for always being ready to sell is quite simple.  It takes a buyer with access to capital to complete a sale and without buyers that have the desire and means to take action, there is no market.

And you never know when you have created something of value for someone else.  Take a look at websites like YouTube.com and more recently Mint.com where young entrepreneurs were offered small fortunes to acquire their business models, only a few years after start up.  Perhaps you would view these as extreme cases, but the point here is when opportunity comes knocking, what will you do?

When a motivated buyer is interested in what you have it typically doesn’t hurt to at least listen.  And the motivation for buying could be all over the map… You own a property with a location of interest, you’ve developed a new technology or have a strong product brand, and so on.

The other side to this coin is what happens if you don’t take advantage of a great offer from an impatient buyer?  You could end up better off over time, but that most certainly is not guaranteed … a bird in the hand …

If the buyer is a competitor with money, then the competitor will likely take another approach to gain market share and end up becoming a stronger competitor in the future.

Another scenario to consider is when a small company hits the market right and starts growing like crazy, attracting buyer interest in the process.  If a larger company steps forward to buy you out because they have the infrastructure and resources to take advantage of your business offering, will you be able to scale the business yourself if you turn them down?

People can look back in the rear view mirror and say so and so business was foolish to sell out to XYZ company because of the profits generated from XYZ over time.  But there is absolutely no guarantee that the buyer would have been able to achieve the same level of success and in fact could have ended up failing badly and cashed out for nothing.

Too often, sellers establish their own time line for exit with the hope that there will be a fair market when the time comes to put the business up for sale.  And when you view your exit strategy decades into the future, this becomes a form of long term horizon gambling.

I’m not saying you should sell anytime someone shows an interest in a business you own, I’m merely saying you should consider it.

The best time to sell may be sooner than you think.

Technorati Tags: buyer, exit, exit strategy, Sell A Business, seller

Creating Optimal Cash Flow Trends Can Significantly Increase The Value Of Your Business Sale

When you list your business for sale, the bids and eventual proceeds you can expect to receive will be largely influenced by historical cash flow results. Your focus cash flow in the period prior to sale, can significantly increase the profit you realize.

Buyers will tend to look at a business sale price as a multiple of the expected future net cash flow. The multiple will vary based on industry and also future expected growth. The best way to increase the multiple in your favor is to focus on optimizing the cash flow base that will be multiplied.

The ideal financial picture would show 3 to 5 years of past financial statements that show steady and even exponential growth in both earnings and cash flow. Alternatively, there are three other historical cash flow and earnings trends: 1) declining cash flow, 2) cash flow that trends up and down, 3) steady or near flat cash flow results.

If your business is experiencing declining cash flow or eradicate cashflow, the cash flow base and the multiplier will likely be reduced due to future uncertainty. Steady cash flow results will not likely impact the base, but the multiplier will not be high due to absence of growth potential.

Lets look at a few different scenarios to give you a better idea of how these different cash flow trends impact a business sale.

Scenario #1. Mature business sale where the business has been in flat to slight decline. This is a very typical situation where the business owner(s) have held the business for a long period of time, are no longer investing in growth, and are at or near retirement age. To prepare for sale, there may be a final push to show better results from selling off assets and optimizing accounting statements. But the long term historical trend will show that the cash flow improvement occurred immediately prior to sale and will not likely stop the base and multiplier from being discounted.

Scenario #2. Business showing steady cash flow results where growth has been siphoned off to the owners. Because the actual financial results do not show growth, there will likely be no increase to the multiplier. If a typical multiplier was 3 to 4, a growth based multiplier could be 5 to 10, potentially making a significant difference to the proceeds the business owner can expect to receive. Yes, the financial statements can be recast to build back in the funds taken out by the owners. But recasting can be imperfect based on the convoluted ways owners extract funds from their businesses. Plus, unless the recast is done by a third party with significant review, its not likely to be assigned much value by potential buyers.

The key takeaway here is to start planning your exit strategy and future business sale well in advance. By investing in growth 3 to 5 years prior to listing the business for sale and generating financial statements that drive results to the bottom line, business owners are more likely to garner premium returns in the market. The extra work and effort could generate a huge payday by potentially increasing both the base and the multiplier.

Technorati Tags: business sale, exit strategy, sell your business

How Do You Sell Your Business For Higher Profits?

Yes, in most cases, it does takes a bit more than the decision to sell and sticking a for sale sign in the ground to get the most profit or return from selling your business interest when you decide to exit.

Here are a few points to consider that can individually and collectively increase your probability of higher returns and a faster sales process once you put your business interest on the market.

#1.  Develop a business exit mindset.  As you grow and develop your business, remember to do so keeping the end in mind.  Part of being in business is to develop asset value that someone will want to pay you for someday. Too often, when business owners are ready to sell, their business is not in what I would call an optimal sell-able position whereby buyers are not rushing to place high value offers to purchase.

#2.  Related to the first point, continually focus on building assets, especially as you get closer to your projected time of exit.  If you are in a service business, building a bigger and more responsive customer list will create more value.  If you are in a more asset intensive industry, keeping your assets up to date, and investing in a physical location will also create more asset value and buyer interest.

#3. Build proof of performance.  The preparation of financial statements and tax strategies can strategically save you money, but can also reduce the historical performance of the business.  Sometimes your accountant can be too cleaver where you may save some taxes in the short run, but loose out on your sales price in the long run.  Remember that while business valuations are done in a number of ways, the primary method will always be some multiple of generated net cash flow.  So the closer you get to business exit, the more cash flow you want to be able to book in the financials, which could end up costing you some taxes short term, but also gaining you even more long term sales proceeds.

#4. Make yourself Dispensable. Too often, business owners do not transition the management and control of the business to others or create systems that do not require their direct involvement.  One of the key things that can scare off buyers is the fear that the business may not be able to profitably continue without the presence of the owner.

#5.  Develop a financing friendly scenario.  In most cases, optimal profits from selling a business and quick business sales, have everything to do with the buyer being able to finance a portion of the business purchase price.  Third party business financing is more likely when lenders can clearly see the historical performance of the business, a solid transition plan, and business assets that have significant market value.  The other business financing aspect of getting an optimal sale price is for the business owner to supply part of the financing.  While this limits the cash proceeds in the short term, it can also make or break the potential for higher total returns.

Vendor financing can also significantly speed up the sales process as third party lenders are more interested in participating in deals where the vendor is also prepared to contribute.  Why?  There are a couple of reasons.  First, the amount of third party financing required will likely be less so less risk to the lender.  Second, the vendor financing will create risk for the vendor and should motivate the vendor to support the transition of ownership and disclose all risks and issues that may impact the business in the future.  This will also reduce the risk of a third party lender.  Third, lenders are not typically interested in financing goodwill,  so when goodwill is built into the sale price, vendors are many times expected to finance all or part of the goodwill valuation, creating a more comfortable position for third party lenders to provide Business Financing

Technorati Tags: business exit, Business Financing, Sell A Business, selling a business, vendor financing

Do You Have A Business Exit Strategy?

Don’t feel bad if you don’t have a Business Exit Strategy as you’ll be in good company with the vast majority of small and medium sized business owners out there.

But to be fair,  you can define an exit strategy in a lot of different ways.

So lets go over the ways I would describe it and you can send me your comments if you see it differently.

The first type of exit strategy is to sell your interest in the business when its worth the most to others.  The focus here is to work on increasing the enterprise value of the business and always have the business in what I call a sellable position, so when opportunity comes calling, whenever that may be, you’re ready to take advantage of a good payday.

The rationale is that you can’t predict when a highly motivated buyer will be looking to invest in what you have been building.  So when ever the situation presents itself, you are ready to entertain top level offers.

The second type of exit strategy or approach to business exit is to build up the business to a point where its doing very well in its market and getting close to peak performance where incremental efforts to increase profitability will only generate marginal gains.  The rationale is that the best price for selling an interest is when a business is at the top of its game and has a solid near term track record to back it up.

There is never any guarantees that performance at that level can be sustained, so why not try and sell out when you can paint the most glowing picture?  If a new competitor enters the market, or an old competitor re-invests, or the economy turns, or whatever … will  the spin off effect create a drop off in business, which in turn reduces the business value?  Here, we never assume that business will be good and like any other market you want to sell at or near the height of the market.

While similar to the first strategy, this approach is more fixed on the near term where the owner may give himself up to 5 years to build up the business and get out.  In the first strategy, while a short term sell out is possible, the main focus is to always be ready to sell if the opportunity arises whether that be in 5 years are 25 years.

Following the first two strategies towards exit, you are always treating your business as an active market position that you are prepared to sell for a good profit at any time.

The third and most common approach is to own and operate a business until you reach retirement age or you just get pain sick of it.  The problem with this approach is that its not really a strategy at all in that its far easier to say my exit strategy is to sell when I retire.  Therefore, no work is required right now, especially if you’re 10+ years to retirement, right?

Wrong, or at least I say its wrong.  Why?  Because when that day comes when you decide its time to retire, what are the odds that the business is at or near its peak value, what are the chances its been built up for sale over a series of years to support a solid sale price, what is the probability that there will be a demand for what you’ll be trying to sell?

If you want to take this approach, then in order to get the most out of your business for retirement, you need to be planning the exit strategy years in advance to build a profitable exit versus hoping a profitable exit will happen.

Unfortunately for many, there is no profitable exit and still others that could have been a lot more profitable with some planning and for thought.

If you don’t have an exit plan, its definitely something to start seriously thinking about.

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