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11 Steps Every Entrepreneur Should Consider When Preparing for an Exit

These actions will help you avoid leaving money on the table when selling your business.

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BY Marc Emmer - 06 Jan 2018

11 Steps Every Entrepreneur Should Consider When Preparing for an Exit

PHOTO CREDIT: Getty Images

More businesses will be sold in the next decade than at any other time in history. Whether you are an early-stage company seeking funding or a more mature company looking to buy or cash out, there has never been a more opportune time to seek liquidity.

For many entrepreneurs, the motivation to sell extends beyond the money; it is the opportunity to realize one's life's work and create a legacy for family, a business and its employees. Yet we can't ignore the underlying economics taking form:

  • According to Bloomberg Businessweek, there is a staggering $963 billion in "dry powder" sitting on the sideline in private equity (PE) firms. According to 451 Research, investment in the tech sector was up 26 percent in Q3. Some seed investment is shifting from venture funds to private equity, and those firms don't get paid when their capital is not deployed.
  • According to the Small Business Administration (SBA), there are over 12 million privately held businesses in the U.S. More than half of them are owned by baby boomers (the average age is 50.3), and 70 percent are expected to change hands in the next 15 years.
  • According to FactSet Research, the average multiple (of earnings before interest, taxes, depreciation and amortization) for transactions of small and medium-sized private companies in Q3 was 9.0 times.
  • Recent tax reform only makes such companies more valuable.

In a competitive market with a lot at stake, entrepreneurs who may not have experience selling a company will have to seize the moment. Here are steps to take in advance of a sale:

Start with the end in mind.

Like anything else, you have a far better chance of succeeding if you have a clear plan, including targets for the business that are well-understood by management. The earlier you include your team in planning, the better the outcome will be.

Focus on the growth plan.

The single most important variable in optimizing value is being able to demonstrate consistent, predictable revenue (void of too much concentration risk in a few customers). The business owner must maintain laser focus on growth (over profit) in the three to five years in advance of the sale.

Secure the right advisors early.

Many business owners talk to wealth advisors, strategic planners and investment bankers very late in the process. Create a team of advisors who can collaborate for several years in advance, and have the pieces in place when you are ready to sell. This will improve the likelihood of a more seamless process.

Know thy market.

Think like a buyer would. In addition to a growth plan, a buyer will want to understand the strategic value you can bring, the diversity of income and customers, and likelihood that management will stay (depending on whether they are a strategic or financial buyer). A good investment banker will help a seller evaluate buyer preferences.

Conduct a value assessment.

It is critical to understand the variables that will drive economic value. Listen for clues in the questions that venture capital investors are asking. These should be the central elements in your strategic plan. If you don't have a strategic plan, get one.

Minimize tax liability.

Too many owners wait far too long to consider their tax liability during a transaction, and they end up giving away a sizable chunk in taxes. The right advisors may have you consider relocation (for the business or the owner) or other tax mitigating strategies such as forming an ESOP. This is why the right certified public accountant (CPA) is critical.

Plan for succession.

Handcuff key staff so they are incented to stay throughout a transaction through options or phantom stock. Giving away a small portion of the proceeds to the people who helped you build value is just good business.

Break up the process.

In planning with your advisors, create a master plan and slice it up into manageable chunks. For example, there may be a phase in which you get an initial valuation or scale your technology. In another, you may focus on personal financial planning.

Build an advisory board.

Board members who are experienced in acquisitions are worth their weight in gold during a transaction. Incent them as well.

Focus on financial readiness.

Many owners have a sizable portion of their financial wealth wrapped up in their businesses. Make sure your assumptions about what it will cost to live are correct.

Think about your final chapter.

Just like having a strategic plan for your business, you need to have a life plan for yourself. It is critical that you sit down with your family and chart out what you want the rest of your life to look like.

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