Exit Planning for Business Owners, Part 2

It’s not only about what to do next but when to do it. See our timeline for making the most of your exit

By Robert J. Pyle, CFP®, CFA, AEP®

Key Takeaways

  • Don’t get so immersed in selling your business that day-to-day operations start to slip.

  • The most important driver of your business valuation is recurring revenue and contracts.

  • Make sure your advisors have experience transacting a business like yours—and don’t wait until the last minute to inform them of your plans to sell.

As we discussed in Part 1, exit planning is a multi-year process, not a spur of the moment decision. Most experts say you need to start planning three to five years out. The last thing you want to be doing on the way to your closing is making frantic calls to your attorney or CPA to track down financial statements or contracts the buyer is demanding to see. I can’t tell you how many accountants and lawyers have told me this is how they first learn about a client’s intention to sell their business. Ouch!

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5 Years Out: Steps to consider

Obtain a professional valuation of your business

Approximately five years before you plan to sell, you should get a professional business valuation (BV) of your enterprise. You want a fair and objective value for your business so you can get a sense of how it compares to other businesses in your industry and how much you can expect to net from the sale. A BV should also tell you your business's market position, financial situation, strengths, and weaknesses (which you can hopefully correct before putting your venture on the market).

You want to find a BV specialist who focuses on valuing your specific type of business or someone who has helped sell a business similar to yours. The most important driver of BV is recurring revenue. The more contracts you have in place with recurring revenue, the better for your valuation.

Get your financials in shape


This is also the time to get all of your financial statements in order. Don’t be a do-it-yourselfer here. Hire a competent CPA or bookkeeper to ensure your financials are accurate and consistent. This is also when you have to STOP running lots of personal expenses through your business. Buyers want to see clean expenses for the business only. Don’t procrastinate. You need to go cold turkey here!

Having clean, well-organized books is critical for giving potential buyers an accurate picture of your business. When it comes time to sell, you will have to explain EVERY line item and whether the line item in question is a one-time expense or an ongoing charge. You also need three to five years of accurate financials so buyers can get a sense of any cyclicality or industry trends affecting your business. Your CPA should specialize in working with small business owners. A few designations to look for are Certified Exit Planning Advisor (CEPA) by the Exit Planning Institute and a Certified Valuation Analyst (CVA) by the National Association of Certified Valuator and Analysts.

Consult your financial and tax advisors 

The buyer is going to look at what you pay yourself in terms of W2 salary and, if you are an S-Corp, what your distributions are from the company. From there, the buyer can estimate how long it will take to get their money back on a discounted cash flow basis.

Get your advisory team in place

Start interviewing attorneys and accountants who are proficient in mergers and acquisitions. Strongly consider hiring an intermediary--either a business broker or an investment banker--to represent you and help you through the selling process. 

Hiring a good investment banker will usually result in a higher sale price and/or better deal terms for the owner. Investment bankers typically have industry expertise and knowledge of possible buyers, plus they can screen possible buyers for you. Investment bankers also know how to structure and negotiate the sale. A business broker may or may not have the skills of an investment banker, but he or she will be able to market your business, help you find the best buyers and set a realistic asking price.



3 Years Out: Steps to consider

Organize your legal paperwork

Review your incorporation papers, permits, licensing agreements, leases, customer and vendor contracts, etc. The buyer will want to know about customer contracts you have in place and when those contracts expire. The buyer will also want to know about contracts you have with vendors, and when those contracts expire. Most buyers will be anxious to know when they can contractually change to their preferred vendors.

Start your succession plan

Retaining your top managers and sales professionals is critical for the success of your business post- sale. Employment contracts and bonuses are key to retaining these top performers. You also want non-compete and non-solicitation agreements in place, so your key people don’t leave and take your best customers/clients with them. This is especially true if your sale is contingent on an earn-out basis.


Know the true profitability of your business

Most privately held businesses claim a variety of nonoperational expenses. Make sure you have supporting documentation for these expenses. For example, your business may be paying for your personal automobile lease. Also, there may be infrequent expenses you have incurred during the past three years that should be excluded in a buyer's analysis of recurring cash flow.

There could be one-time expenses such as software conversion fees or location moves that should be excluded from the annual expenses.


1 Year Out: Steps to consider

REALLY know your reason for selling

Buyers are always curious as to why a seller wants to exit a business. Owners have a myriad of reasons for wanting to sell, but it could be a simple as wanting to retire and see the world. Perhaps they know a relative who hung on to their business for too long, so they were never able to retire fully before they or their spouse got too ill to travel.


Keep your eye on the ball 

Don't let your business performance decline because you're overly focused on selling your business. A sudden drop in revenue will only give buyers additional negotiating power to lower their offer. If you are immersed in selling your business and focus exclusively on revenue rather than profit, you could make the common mistake of taking on high-maintenance new clients or customers that increase your topline revenue, but decrease your profit margin and thus will be a drain on your business. Focus on bringing in profitable new business only.


Spruce up your “curb appeal”

Make sure your place of work is clean and tidy, and that any necessary repairs have been made. If there is equipment required to run your business, make sure it’s all in working order. Make any outdoor improvements to landscaping, signage, etc.  


Selling a business is one of the hardest and most emotionally wrenching transactions you may ever do in your life…..don’t be a do-it-yourselfer or a Last Minute Louie. There are so many things to consider to prepare for the sale, and what to do after the sale, you need someone to help you through this transition. If you or someone close to you is considering selling their business, please don’t hesitate to contact me. I’d be happy to help.

Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail info@diversifiedassetmanagement.com.


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