At some point down the track, you will most likely find yourself with a successful business that you want to sell or pass to another. These exits can be planned or unplanned.  Either way, it is best to be ready to exit. It is quite likely that the value of your business, when you sell it, will be closely related to its profitability. Therefore, it makes sense to spend some time and energy positioning your business for the most profitable sale that you can achieve. Our C4.0 Introduction to Turnaround90C2.0 Optimise Your Business Enterprise in 100 Days (O100) and Grow365 Campaign Signup Courses are designed exactly for this purpose. They include essential actions for anyone considering selling their business within a year or two.   Yellow Belt  

Reasons for Exit

You may be an intentional seller of your business but it is also possible that you will need to sell your business unexpectedly.

The following is a list of reasons why your business might go on the market:

The moral of the story is that a wise business owner tries to keep the business tuned for profit in case of a planned, or unplanned, sale.

Exit Strategies

Business exits fall roughly into four categories:

Trade Sales

A trade buyer will pay some multiple of price, which is often more than a new entrant. This is because they can see the strategic advantage of bolting your business onto their existing business.

They will be pricing it more for the future value your business brings strategically. To maximise your sale price to this type of buyer, you will need to demonstrate the maximum potential.

This is why very large sums are paid for (e.g.) hi-tech start-ups that have never made a profit but have a strategic ‘runway’ for the buyer.

The course “Grow Your Business in 365 Days(Grow365) will help you with this. It is about focusing your business for future growth.

Go to the Menu: Optimise the Growth of My Business Over a Year (Grow365)
Register for free to gain access to the Diagnostic links.

New Entrant

If you are selling to a new entrant to the industry, they are going to be more focused on the present profitability because that will help them cash-flow the purchase and/or act as collateral to borrow from the bank.

You can periodically run the 12Faces Course “Streamline My Existing Operation (Optimise100). Scrape off profit-slowing ‘barnacles’ from your business to maximise its profit.

Go to the Menu: Streamline My Existing Operation (Optimise100)
Register for free to gain access to the Diagnostic links.

Succession Planning

This is usually when the business is passed to family members.

It can be a fraught process due to (e.g.);

For all these reasons, succession planning has its own professionals well worth consulting to facilitate the process.  Both because you don’t know when you might want to leave (say due to ill health) and because some times transfers have to be done over a long period of time, if you are going down this route, best to get started sooner rather than later.

 Management Buyout

This option is usually abbreviated to MBO. It means your existing senior manager(s) buy you out of the business.

They clearly know the business so can make informed decisions on its prospects and what they should pay.

If you are going down this route, there are specialist books you can consult for guidelines.

Sale Boosters

Irrespective of the reason that you are exiting your business, you are likely to get the best price for it if its profitability is as high as you can get it.

If you know that you are planning to leave your business, you could, for a comparatively short period of time, use our Optimise100 and Grow365 techniques to get the business as profitable as you can.

This may seem rather like a sprint at the end of the marathon of running your business for several years, but, for a comparatively small amount of time and energy, you can get a considerably better price.

Also, several of the reasons given above can cause you to put your business on the market unexpectedly. So it makes sense to keep your business as profitably tuned as you can all of the time.

Perhaps a final quick sprint to get it as profitable as possible prior to selling. One can be mindful of the old Boy Scout motto “Be Prepared”.

Other Issues to Consider

Selling the Shares or the Business Assets

As well as planning your exit from a profitability point of view, there will be a number of legal and tax issues that you may want to take into account, and prepare for, in advance of a planned or unplanned exit sale.

You may want to consider the legal structure of your business. A buyer will not want to buy an overly complicated legal structure and may choose to buy just the business assets and not the shares in the business.

If they buy the shares, they buy the business but also inherit any legal complications, tax implications and reputation of the company. They are generally not interested in picking up these problems.

In this eventuality, you will need to work out how to separate the parts so that this is possible.

Purchase and Sales Taxes

In some countries, the sale of the business incurs Stamp Duty, or a similar tax, imposed by the Government on the buyer of the business.

In some jurisdictions, if the buyer buys the shares of the business, rather than the operations of the business, they can avoid paying Stamp Duty. However, they will not want to buy the shares in a business that is overly complicated.

You may want to remove any attachments that will not be sold with the business or shares, well in advance of putting it on the market.

This could include personal vehicles, holiday homes and investment properties that are not going to transfer with the sale of the business.

In many jurisdictions there will be a Capital Gains Tax, or a similar tax, levied on the seller for the profits they make.

Unfortunately, if you have been successful in starting up your own business from zero, you will find that you are likely to end up paying a larger amount in Capital Gains Tax than if you had purchased your business.

The reason is that you pay the tax on the difference between the purchase price (which with a Start Up is zero) and the selling price.

Some advance planning using e.g. Trusts, might enable you to manage this situation.

Because it takes some time to do, you may want to start this type of planning well in advance of your potential sale.

Problems

There are specialist writers on the topic of selling businesses. If you are serious about selling, you should read some of these.

There is also an industry known as ‘business brokers’ who help to sell businesses.

They will charge a selling commission but their services and their industry contacts identifying potential buyers can be useful.

Due Diligence Periods

During your sale you will need to, as they say, “open the kimono” and show the buyer all the aspects of the business that they want to know.

This is rather a fraught time because you are allowing someone – who may be a competitor of yours – access to a lot of your business knowledge. Even though you may have a “non-disclosure agreement” that theoretically prevents them from taking this information away and giving it to third parties, in reality, this is very difficult to police.

You may be able to reduce the probability of stealing your Intellectual Property by only giving them access to some of the details of that property at the time of purchase. They can certainly know how well the Intellectual Property does its job but you can avoid them understanding exactly how it does its job.

There is a risk during the due diligence period they will see, and then steal, your customers and there is very little that you can do about that.

The due diligence period can be intentionally, and unnecessarily, prolonged to ‘starve you into submission’. They may try and lock you into an exclusivity deal where you cannot approach anyone else.

You should approach all of these types of issues with a great deal of caution. A good business broker can advise you.

Earn Out Clauses

In many jurisdictions, it is common to have “Earn Out Clauses”.

This means that you get, perhaps, 75% of the money at the time of the sale and the other 25% of money comes over time if the business performs as well as you said it would.

The great difficulty with this is that you may not be there to run the business. Therefore, you have no control over whether the profitability that you said was possible might have been achieved if you continued to run it.

If your business is merged into another, it can be very hard to identify what is the profit from just your part of the business.

For this reason, many experienced Business Brokers say that you shouldn’t plan on getting this final sum of money and if you do, that is an additional benefit.

Part of the Earn Out process may be that you are required to continue to work in the business. This is your call but you might keep in mind that the sorts of people who can start and run their own business don’t necessarily work very well in harness for another, more senior, manager. The upside is that you can better monitor any “earn out” clause.

When to Tell the Staff

Deciding when to tell your staff is a very difficult timing issue.

If the staff become unsettled because they think they might lose their job, they start looking around for positions with more job security. You lose staff even though you haven’t managed to sell the business.

This might be particularly the case if the operation buying you is physically located elsewhere and your workers think they might close the business and move customers to their other operation and make your local staff redundant.

You can consider offering retention incentives by way of so-called “Golden Handcuffs” that give them a bonus if they remain until the business is sold; and perhaps sometime after the sale while you are still in the Earn Out period.

Resources

There are a number of books that specialise in the sale of Small Businesses. If you are thinking of exiting in this way, you might want to start to read a few of them.

One of the well known writers is John Warrillow and his best known book is Built to Sell and a later book that summarizes his vast collection of tips gleaned from his podcasts.

Warrillow also does a popular Podcast with something in the order of 350 interviews with businesses (count in early 20121) of various sizes that have sold their business.

Listening to these Podcasts, while driving, can be informative if you are thinking of exiting.

Warrillow also has some online survey tools that you can quickly apply to your business to see where its strengths and weaknesses, from a sales point of view, might be. Visit https://www.builttosell.com/

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