Planning Your Exit and Building Pre-Sale Business Value

Planning Your Exit and Building Pre-Sale Business Value

When you’re preparing to exit your business, it’s not just about closing shop; it’s about leveraging everything you’ve built to maximize the value of the sale. The process is a blend of strategy, timing, and preparation. Whether you’re looking to retire, pivot into a new opportunity, or simply cash out, your success depends on how well you plan your exit and position your business as a valuable asset to the right buyer.

Step 1: Establish Your Exit Strategy

First, you need a clear outcome in mind. Are you selling part of the business and staying involved, or are you ready to hand over the reins entirely? Your timing is also key—whether you're looking for an immediate sale, a transaction within a year, or a longer window of two to three years. Each of these decisions affects how you structure the deal, and they should be aligned with the business's current financial condition.

Next, decide on your financial objective. Businesses sell at multiples of their earnings. A business in great condition commands a higher multiple, while those in need of work settle for less. If your business isn’t at its best, you either commit the time to improve it or adjust your price expectations.

You’ll also need to think through payout options. Do you want all cash at closing, or are you open to seller-financed loans to attract more buyers? Keep in mind, all-cash deals often come at a lower price because they limit the buyer pool and slow the sale.

Finally, you need to define your ideal buyer and your role post-sale. Whether you prefer to sell to a partner, an employee, or an outsider, these decisions will shape your entire exit strategy.

Step 2: Know What Buyers Are Looking For

To successfully sell your business, you need to understand what buyers want. Buyers focus on businesses with the following characteristics:

• Strong Revenues and Profits: It’s all about the bottom line. Buyers look for businesses with increasing sales and strong owner earnings. Your earnings will be a key factor in determining the valuation.
• Solid Financials: Buyers want to see clean books. They’ll expect three years of financials showing positive cash flow, strong working capital, and no major debt issues.
• Legal Cleanliness: A buyer won't touch a business with unresolved legal issues. Whether it’s lawsuits, contract disputes, or zoning problems, these must be cleaned up beforehand.
• Competitive Products and Services: Your business should have unique products or services in demand, with a track record of profitability. Proprietary processes are even more attractive.
• Location, Location, Location: A great location can significantly increase your business’s appeal. Whether it's access to a booming customer base or a prime spot for employees, a strategic location can set you apart.
• Facilities and Equipment: Modern, well-maintained facilities and equipment are non-negotiable. Buyers want assets that are in good condition or on long-term, transferable leases.
• Process and Systems: Well-documented processes signal that the business can run without you, which is exactly what buyers want. They’re looking for a turnkey operation, not something dependent on the owner’s presence.
• Staff and Management: Buyers need assurance that the business won't fall apart if you’re not there. Key staff with signed contracts, proper training, and benefits are essential to ensuring continuity.
• Loyal Clientele: A buyer wants to see a business with a solid, repeat customer base that’s not overly reliant on the current owner’s relationships.
• Strong Brand and Reputation: A respected brand, a positive online presence, and strong customer reviews add significant value to your business.
• Transferability: Buyers expect a smooth transition. That means customer contracts, processes, equipment leases, and key employees should transfer seamlessly to the new owner.

Step 3: Assess Your Business as a Purchase Prospect

Once you know what buyers are looking for, it’s time to evaluate your business through their eyes. Use a structured assessment tool to gauge your business's readiness across key areas like revenue, profitability, and transferability.

If your business checks all the boxes, you’re ready to go. If not, you have a few options: liquidate, make necessary improvements to boost value, or sell at a lower price. Your decision depends on how much time and effort you’re willing to invest before listing the business.

Step 4: Improve Your Business to Attract Buyers

If your business needs work, now’s the time to make targeted improvements. Focus on the areas that matter most to buyers:

• Increase Sales and Profits: Look at trends over the last three years and develop strategies to increase revenue and profitability. This might mean exploring new revenue streams, renegotiating supplier contracts, or adjusting pricing models.
• Strengthen Financial Health: Make sure your accounts receivable are in order, reduce unnecessary expenses, and improve cash flow. Buyers want to see a business that is financially sound.
• Resolve Legal Issues: Any pending lawsuits, zoning issues, or other legal problems need to be addressed before you even think about listing the business.
• Improve Facilities and Equipment: Ensure that your equipment is well-maintained and ready for use. Create an asset list for transparency, and resolve any issues related to equipment ownership or lease transferability.
• Optimize Operations: Document your processes and streamline operations. Buyers want to see a business that runs efficiently, with systems in place for continued success after the sale.
• Build a Strong Management Team: Make sure your business isn’t reliant on you alone. Train key managers, have them sign contracts, and create a solid organizational structure that supports a smooth transition.
• Diversify Your Client Base: If your business relies heavily on one or two clients, it’s time to broaden the customer base. Buyers will view concentrated revenue streams as risky.
• Enhance Your Brand and Reputation: Strengthen your brand’s online presence, cultivate positive reviews, and ensure your website and marketing materials are up-to-date.

Step 5: Structuring the Sale for Maximum Value

How you structure the sale is critical. Whether it’s an asset sale or an entity sale, both approaches come with unique benefits and tax implications. Buyers typically prefer asset sales because they avoid taking on any of your liabilities, but sellers favor entity sales for the favorable tax treatment.

Seller financing can also make a big difference. Offering a portion of the sale price as a loan can attract more buyers and lead to a higher price. Just make sure to secure the loan properly and understand the risks involved.