Key Questions To Ask Yourself As Part of Your Exit Strategy
1. Why are you selling your business?
People either move away from pain or go towards pleasure. So what’s pushing you away or pulling you in a different direction?
- Are you burnt out or bored?
- Maybe you’d like to travel the world or spend more time with family?
- Do you have health or family issues?
- Is there a different type of business that you’d like to build or invest in?
- Do you want to spend more time giving back to the community?
- Is too much of your wealth tied up in your business?
If your personal finances are a concern, did you know that there are ways to take money out of your business now, without reducing the value of your company? Would this decrease the pressure you’re under to sell? If so, consult your accountant, CFO, or a consultant. They should be able to provide you with options.
As you think about why you want to sell your business, write your motivations down on paper. Share them with trusted colleagues, friends, and family members to get their perspective. Working through this exercise will help you create an exit strategy with a realistic timeline.
2. What do you want the outcome to be?
Of course, you want to put a lot of money in your pocket, which usually correlates with getting the highest possible sale price for your company.
Also ask yourself these questions:
- Do you want to leave behind a legacy? Maybe you’d like to be known as a legendary founder and business leader. Or you could establish a scholarship fund or make a large donation to a community or professional organisation.
- Is it important for you to protect your employees to ensure their job security, financial security, and overall wellbeing?
- Could you consult or advise the new owner after the sale is complete?
- Maybe you’d prefer to sell and never have to think about your business again?
Jot these thoughts down on paper so you can reference them later. Your insights will influence your exit strategy, your process, and the type of buyer that you sell your business to.
3. When do you want to sell your business?
If your answer is, “In one to two years.” you probably aren’t giving yourself enough time to maximize your potential end game. Based on our experience, a five-year timeline is ideal, especially if you want to set yourself up for the strongest possible financial outcome when you sell your company.
In years one through four, you should remove any potential risk that a buyer may see. As we’ll explain, there are also things you can do now to increase the value of your company. If you’re going to make these types of changes, you’ll want to allow time for the results to take hold, especially since any buyer will want to see years of historical data. Later in this post we’ll outline tips to help you identify risk.
In year five, you’d actively prepare your business for the sale. That would include marketing to potential suitors, conducting the interviews, and managing negotiations.
4. Who do you want to sell to?
Many of our clients aren’t aware that there are many types of potential buyers. You could sell to an entrepreneur, a partner, employees or existing managers, family members, or a private equity company. You could create a family fund or LLC, or you may want to take the company public. Each path has its own pros and cons. It’s important to understand each type of buyer, as they’ll expect to see specific types of information in order to make an informed purchase.
5. Do you know how much your business is worth?
You’ll want to hire an independent third party to conduct a valuation. This will help you understand what the market thinks your business is worth now and what buyers will pay for it. We’ll dive into this process in a future blog post. In the meantime, remember that your answers to the questions in this post will impact your valuation.
6. Have you removed as much risk as possible?
Any savvy buyer will conduct extensive due diligence. Most importantly, they want to identify risks. What issues would a buyer have to navigate or address if they purchased your company? These could be perceived risks:
- A small number of customers drive the majority of the revenue
- Decreasing customer satisfaction scores
- Extensive debt on a balance sheet
- Variability in your earnings
- Disengaged employees, low employee retention rates, or corporate culture challenges
- An owner is the main decision maker and rainmaker
- High workman’s compensation expenses
- A narrow or limited product offering compared to competitors
- Known product flaws
- Shifts in your industry, like increasing material costs, a new competitor, or less demand
- Supply chain issues
- Reliance on one or two suppliers for the majority of your materials
- Weak brand recognition
Sit down and make a list of all of the things that buyers could perceive as risks. Ask your leadership team to do the same. What steps can you take now to fix those problems?
When you start to work through your valuation, add or subtract value from your company based on this risk assessment. For example, if you’re able to eliminate a risk, how much more do you think your company might be worth as a result? Or, if you can’t change a particular risk factor, how much less might your company be worth?
7. Have you taken steps to make your business scalable?
Buyers want to purchase a business that will grow exponentially and quickly, right? So what can you put in place now to make this a reality?
- Strengthen your management team
- Enhance your intellectual property
- Adopt better technology
- Optimize operations
- Increase the number of high-paying customers
- Streamline your sales and marketing costs
Eliminating risks and taking steps to make your business more scalable will take time and resources. As you work through both of the questions above, is your timeline for exiting still realistic? If not, how much more time might you need? Remember that these types of changes can take months or even years to implement.