Trustmark Mergers & Acquisitions

How to Create an Exit Strategy and Avoid Costly Mistakes

29.04.24 02:15 PM By MARK HERRMANN

How to Create an Exit Strategy and Avoid Costly Mistakes

If you're thinking about selling your business, it's important to have a clear and well-thought-out business exit strategy. To begin this process, you need to identify the elements that led you to consider selling your business in the first place. If you do not examine why you are selling in advance, you are much more likely to make costly mistakes.

Examine Your Motivations and Preferred Outcomes

The first step is to identify what's motivating you to sell your business. Be honest and forthright. Money is not the only motivator involved in selling a business.

  • Do you want to retire?
  • Are you ready to move but your business is reliant on its current location?
  • Is all your net worth tied up in your business and you to want to sell in order to diversify?
  • Are you divorcing and forced to liquidate?
  • Or, are you simply bored or burned out?

Factors such as serious illness, a death in the family, or simply owner burnout are strong motivators for a fast sale. Under these circumstances, owners may accept a lower sale price from the first qualified buyer just to get out quickly.

The Immediate Need to Exit Can Equate to a Lower Sale Price

If you move too quickly, you eliminate the opportunity to improve the value of your business. In addition, you may shorten or eliminate the possibility of a transition period, which could likely force a lower offer. 

Planning Ahead of Time Is More Likely to Yield a Higher Sale Price

In contrast, some business owners plan their exit strategy well in advance of selling. Their motivations for selling may be to take money off the table for their retirement. Under these circumstances, the owner is more willing to take the time and properly prepare their business for sale, and then wait for the right buyer to come along. These patient owners are usually more flexible and willing to finance a portion or all of the business. The sales process may take quite some time, but the outcome is more likely to yield a qualified buyer who is willing to pay a higher sale price.

Define Your After-Sale Interests

  • Are you concerned about the future of your business?
  • Do you want to leave the business once and for all?
  • Do you want to stay involved, as part owner or consultant?

Everyone hopes to fetch the highest price for the sale of their business, but many sellers are also concerned about the future of their businesses. Some want to leave once and for all and others want to stay involved, either as a part owner, a contract employee or as a consultant to the new owner. As a seller, is it important that your business remains in its current location in order to minimize disruption to your clients and to your staff? Is there a key competitor that you'd prefer (or prefer not) to sell your business to? Are there key employees or even a family member to whom you prefer to sell your business?

Sellers' Motivations Have a Direct Impact on the Outcome of the Sale

The sellers' motivations impact their desired terms for the deal, as well as their expectations for the deal. This fact is not lost on prospective buyers who are quick to ask why the owner is selling. The answer strongly influences how potential buyers structure their offers. If a business buyer knows that a seller is willing to stay involved for some time and will offer to finance a portion of the sale, it makes it easier to meet a higher price point.

Conversely, business owners who want to cut ties immediately and insist on all cash up-front may leave buyers questioning the health of the business and make it more difficult for buyers to finance the purchase.

By carefully understanding your motivations and the outcomes that are important to you, you can define the variables that will shape your business exit strategy.

Identify and Resolve Any Potential Conflicts

Once you've examined your motivations for selling your business and your desired outcome, you've probably discovered a few conflicts. You may want an all-cash sale, but you also want a high selling price. You may want to get a high selling price and a minimal disruption to the existing business. Any possible conflicting priorities could jeopardize the successful sale of your business.

Make a Ranked List of Your Priorities and Formulate a Sales Strategy

Business brokers can be very helpful in assisting sellers resolve their conflicts, develop a sales strategy and achieve the best possible outcome. Developing a pre-sale preparation plan can be one of the most effective ways to iron out many of these conflicts. Pre-sale preparation will not only help owners more accurately assess their business, but also help them prepare it for market and receive the best possible sale price.

-Excerpted from BizBuySell