Most people start a business without an exit strategy. Suddenly they wake up and realise it’s probably their biggest asset, perhaps after their home but what are their options? Pass it on to a family member (can be complicated) or sell and reap the rewards.
I’ll split the question in two parts:
Planning the exit strategy
The sooner you start planning an exit strategy the more value you will get and the quicker the sale when you actually put it on the market.
There is much more to the value of a business than merely EBITDAR (earnings before interest, taxes, depreciation, amortization and restructuring/rent), which is often banded about.
These are the drivers to a better business value that you can plan to implement or improve.
Financials
As just mentioned, it’s not just how good your P+L and balance sheet look but also how good the reporting is. Do you receive these important reports in a timely, regular way?
Assets
The value of stock and equipment. Have you got old, redundant stock? Is the equipment up to date and in good repair?
>See also: How to value the goodwill
Location
Is it location dependant? Could it be relocated? If you are in leased premises, how long is left on the lease? If you own the premises are you going to retain the freehold and issue a new lease?
Systems and processes
How easy would it be for someone to take over the business and actually run it? Are the systems and processes mapped out? Are you using up to date software?
Dependence
What percentage of turnover is dependent on one customer, employee or supplier? Can you reduce that dependence?
Cash flow
Does the business swing between high cash/no cash? Could you improve the cash position by charging a deposit or reducing payment terms?
Recurring revenue
Is there a percentage of revenue that comes in every month without more sales effort, such as maintenance or service contracts?
Customer satisfaction
Do you have regular, happy customers who would recommend you?
Cost of entry to the market
For someone to start out would it require a big investment in capital equipment?
Growth potential
Are there new markets you can move into? Have you a list of lapsed previous customers who could be marketed to? When your business is on an up and growing it is easier to sell than one on the way down.
USP
How strong is your Unique Selling Point compared to your competitors?
Finally, it’s all about you…
How dependant is the business on you being in the middle of it? Will customers, suppliers and staff only talk to you? What happens if you go on holiday? Can you change this?
>See also: Valuing your business for sale
How to sell the business
The options are a trade sale or a sale to someone new to your business sector. In both instances, get a non-disclosure agreement (NDA) signed before you get too far into negotiations.
Trade sale
This is to someone already working in your sector. It’s a much easier, quicker sale as they are aware of the good and bad in the sector already and don’t need to do time-consuming research. You could approach your competitors yourself and save on agent’s fees but be careful not to disclose too much about your customers and suppliers.
New to the sector
You will need to not only provide info on the business but also info about the sector itself – how large is the market? What’s the competition like? etc. Probably best to sign up with a business transfer specialist.
Don’t take your foot off the gas…
It can take time to sell a business, so have patience and do not “let your foot off the gas”. Keep moving the business forward and don’t let up – this is very important so that you can maximise the sale price.
Simon Rigby is the principal of SME Assistance
Further reading on exit strategy
How to sell your small business without a broker – Small Business guide