Exit Planning for Entrepreneurs
Mark Tepper
As a certified financial planner, I’ve seen entrepreneurs spend endless hours managing their company’s day-to-day operations to optimize efficiency, only to give little thought to planning how and when they might exit their business. For those owners looking to sell, a well-conceived exit strategy can facilitate receipt of the maximum sale price and help ensure a comfortable retirement. Here are some best practices I share with my clients in preparation for their eventual business exit:
Use Time to Your Advantage
When it comes to the exit-planning process, you can never start too early. A minimum lead time to adequately plan for your business exit is three to five years. As a starting point, it’s important that you detach yourself from your role as an owner and begin viewing your company through the eyes of a prospective buyer. Acquiring investors will pay a multiple of your free cash flow (or EBITDA) based on how risky they perceive your business to be. The more risk, the lower the multiple. Therefore, the two-pronged goal is to increase your EBITDA—especially in those critical years immediately prior to the sale—while simultaneously minimizing risk in your business.
Determine Your Financial Readiness
Equally as important as planning ahead is the creation of a personal financial plan, along with a market valuation of your business, to determine where you stand. A good financial advisory firm that specializes in working with entrepreneurs can craft these two critical pieces and orchestrate the eventual exit strategy. What’s more, integrating the business and personal planning will help you determine the sale price needed to fund your lifestyle post-exit. This approach will also help you quantify your business’ worth today and map out the best course of action to reach your target valuation.
Bulletproof Your Business Model
I always tell clients to structure their business so that it’s independent of them. Businesses that are dependent on a specific owner become very risky investments once that individual departs. To put this into practice, hire someone to operate the daily business activities, and then learn how to govern the company from a distance. And don’t forget to document systems and procedures. This “how to” instruction manual can’t be in your head. The business needs to be able to run like a well-oiled machine immediately after you’re out of the picture. Choosing not to develop this guidebook will inevitably lead to a lower multiple.
Organize Your Financial House
To stay ahead of the game, ensure that CPA-reviewed or –audited financial statements are available and in order. Most potential buyers will want to see three years of statements. As the seller, you will also want to back out of any “lifestyle” spending that had been run through the company, such as car payments, meals and vacation costs. Removing these expenses will help increase your EBITDA. Finally, eliminate unpredictable roadblocks, such as lawsuits or accounting issues, as any potential issues will translate to a lower multiple.
Assemble an All-Star Team
Before weighing any offers or making it known that you’re in the market to sell, create a team of advisors to help guide you through this process. Seasoned advisors have been through this process numerous times; select one that you feel has his or her interests best aligned with yours. This advisor should be the leader of your team, and should act as the intermediary to ensure that the rest of your squad is synchronized.
Ultimately, when it comes to planning for your business exit, understanding the process from end to end can help you avoid common pitfalls and determine where you can best maximize valuation. If there’s one thing I learned while working with countless business partners for more than two decades, it’s that preparation is king. The better prepared you are, the more successful your transition to the real world will be.
Mark Tepper is the president of Strategic Wealth Partners. Fun fact: In his free time, Mark enjoys coaching tee-ball, playing softball and golf, and vacationing excessively with his family.
