Thinking of Leaving your Business?
Maximise your Value and Minimise your Stress:
– avoid these 11 Exit Pitfalls
There are two sorts of Pitfalls – A. relate to an owners perspective and B. relate to bad activities.
A. Exit Pitfalls due to perspectives
As a business owner, you have gone the hard yards, worked the extra hours and put in the risk and effort – sometimes that can impact how you feel about your business and therefore how you value it. These exit pitfalls arise due to a lack of understanding about how others will unemotionally perceive a business.
1. Being Unclear about How to Exit
Selling isn’t the only business exit option, there are other strategies that may be more applicable, so remember to start by deciding the “How” of your exit:
* Step Away – declaring bankruptcy, and/or being placed in Voluntary Administration, involve immediately replacing both control and management.
* Close it up – “shutting up shop” and walking away
* Give it Away – transferring the ownership of your going concern to family or staff member for no return.
* Sell – undertaking a commercial transaction to transfer ownership
2. Imagining the Business Value
When you have “nothing”to sell there is no possibility of a sale. Have a realistic understanding of the value of your business is vital to establishing what actions you need to take. Surprisingly, many owners think their business is worth much less than the market will be willing to pay, usually because they are “worn down” by years of hard toil – don’t let your weariness be the cause of a devalued sale.
Business Appraisals are expensive – but provide valuable information. Do your own “quick and dirty” version to get a guide of what you can expect….Steps to making a DIY Business Appraisal[/box]
3. Expecting Hundreds of Potential New Owners
No sale can happen without a buyer: – selling isn’t just about price, but also about the market. Each potential buyer will be looking for different things, such as future cash flow streams, growth potential, return on investment or synergies; knowing these key factors will allow you to prepare appropriately. If you have a very specialist business it may take time and effort to find the appropriately enthusiastic and qualified buyer.
B. Exit Pitfalls due to inactivity
Like many big leaps, success is primarily in the preparation. The more prepared the business is prior to the commencement of the sale process, the smoother and usually more successful the subsequent process will be. These exit pitfalls arise when insufficient preparation is undertaken:
4. Messy Books
Make sure all your tax returns are up to date, and your business reports clearly differentiate between “necessary” business expenses and those that have occurred at your discretion. This is probably the most important step in establishing a strong selling price, but is necessary in other circumstances.
e.g. a new business owner may not want, or need, to travel to Italy annually even thought this was part of your expenses; as this will impact how a new owner will calculate profitability it is important to identify it as optional.
5. Confusing Business Assets with Personal ones
That stuffed moose head in reception that you won at a convention will be part of the Business Assets and therefore part of the sale. Most cars are also be packaged as Business Assets so don’t get left without wheels the day after the sale. Review the things you do not wish to sell and itemise them as excluded in the sales contract. There is a caution here, do not remove assets if you are considering liquidation – untimely removal may be considered theft!
6. No systems or processes
If the business relies on you and only you then it will not be sale-able. Every new owner will want to see “how we do it here” so they can keep or improve on things accordingly. The more work you do here the broader your market and push up your price becomes because a good manual will enable people outside your industry to succeed.
7. Expecting Staff Support
For the same reasons as above, your business needs to run without you and so preparing your staff for change is vital – not everyone may be happy with your decision to exit. Ensuring you create continuity after sale and retain “business deep smarts” for the new owner will improve your sale value. Remember too that if you are considering closing, you need to give employees appropriate notice and may also need to provide termination payments.
8. Ignoring Tax implications
Tax is complex, so get good advice and do lots of research to ensure the best fit exit and tax strategies. Both sides of the coin are important here – you don’t want to pay the tax-man too much, but shorting your tax bill will land you in hot water.
9. Selling “dust and all”
Just like selling a house, a bit of a spruce-up goes a long way to improving appeal. If you have had a gut-full and “just want out” it may be worth paying a handyman to apply a lick of paint or consider hiring a commercial cleaning team for a day. A very simply “filing bee” may be all that is needed to give staff time to clear their desks and archive old files.
10. No Sales Tools
While you may not want to slap up a “Business For Sale” sign on the front door – a booklet describing the business for buyers to determine whether they are interested or not in pursuing a purchase. Don’t give away all your trade secrets, interested buyers can ask for more detailed information – your broker will help you with this, or there are plenty of templates on the internet – e.g. Selling Memorandums by Inc Magazine. Also doing some networking at relevant trade shows, to “get the word about” to people who are like minded can also be beneficial.
11. Doing your Own Legals, Brokerage, etc
We recommend you at least use a lawyer to draft all your contracts including a Heads of Agreement, plus if you are selling there is also the choice of using a business broker or not. Decide early about who you want to use, and what tasks they will do, as these decisions will impact the amount of work you need to do yourself.
*If Bankruptcy and Administration are your only option then the new management will handle all of these factors and undertaking any of these steps may land you in legal trouble.
Exit Pitfalls are easily avoided and exiting your Business can be a good experience, as long as you are well prepared!