Thought Leadership on Exit Planning presented by Stony Hill Business Brokers.
Do you have an exit planning advisor? If you do, congratulations. You are in the minority, and you are wise enough to know how valuable this trusted advisor can be. Preparing a business for the eventual transition to a new owner, whether it is a family member, the management team or a third party, can ensure that transition is successful in many ways.
Let me put into perspective the risks of not planning for a successful exit. Consider that there are approximately 7 million privately held businesses in the U.S. owned by people in the baby boomer generation. Somewhere between 1.3 million and 2 million of them will be sold in the next five to 10 years. Maybe a third of them will be sold to employees or to a family member. Therefore, if you have any expectation of exiting your business in that time period, you will face significant competition for a buyer.
What happens when supply exceeds demand? Prices are negatively affected. In the face of this competition, what can be done? Prepare your business for that eventual exit. With the help of an exit planning advisor, you can define and execute a sound strategy for your business that will increase its value and cause it to stand out among the many others on the market.
The return on investment with an exit planning advisor can be substantial. Assume a business that is generating $300,000 in net profits will be priced between two and three times its earnings. For the sake of argument, let’s use 2.5 times as the multiplier, or a value of $750,000. With an exit plan that minimizes the risks to a potential new owner, the multiplier can conservatively be improved by one 10th, to 2.6. This improvement results in an increase of value equaling $30,000. In many cases, the multiplier can increase by much more than that. The leverage from a good exit plan is tremendous.
The value of an exit planning advisor is not only the increase in value, but the suggestions that will lower the tax impact. An exit planning advisor will also help with the due diligence preparation, making the sale process much easier and smoother for both seller and buyer. This takes the pain out of the process, and and ensures its confidentiality.
The exit planning advisor can join with your other trusted advisors and coordinate efforts, allowing each person’s expertise to be synergistic to the overall business and personal growth strategy. In addition to the actual sale transaction, there are many other dimensions to exiting a business. Do you have an investment strategy for the funds received from a sale? Do you have a retirement strategy for what you will do with the free time? Do you have an estate plan and strategy for inheritance? All your trusted advisors who contribute to these plans can be more effective if teamed early in the process before exiting your business.