Exit Essentials
- Start early: Strategic exit planning boosts business value and operations long before a sale. Don’t wait until you’re ready to sell to begin planning.
- Reduce owner dependency: Train staff, develop managers, and build systems so the business runs without you. Buyers pay premiums for self-sufficient companies.
- Clean financials matter: Accurate records, clear owner expenses, and a proactive tax strategy simplify due diligence and can save significantly on taxes.
- Profit drives value: Every $1 added to net profit can increase business value by $2-$3. Focus on performance as the single biggest lever for a higher sale price.
Preparing to Sell Your Business? You Need an Exit Strategy
Strategic exit planning is the best proactive action you can take as a business owner to build your business and increase its value for an eventual sale.
Regardless of how distant the sale may seem, developing a strategy with an experienced business broker will increase the value of your business as well as improve its overall operations and profitability.
Developing a business exit strategy may seem daunting, and you may not know where to start, but it doesn’t have to be complicated. We’ve outlined the basic elements below. If you need guidance or prefer professional help, our firm can consult with you to navigate the process.
Pre-Sale Business Preparation
Having successfully sold hundreds of businesses throughout Orange County and California, we have gained a great deal of experience and insight into what drives a successful sale.
Our sales span diverse industries, yet the companies that sold quickly and for a premium had several things in common. If you’re preparing to sell your business, these are the key details to note.
Key Factors Driving Business Value
- Good Financial Performance
- Clear and accurate financial records
- Owner dependency is minimal, or a path to replace the owner has been established
- Well-defined and efficient operational Infrastructure
- Broad customer concentration
Things To Address in Your Business Exit Strategy
Whether you’re developing an exit strategy for a small business or a larger company, here’s a 7-step outline of what it should address. Elaborate on each item below with your preferred level of detail.
1. Owner Dependency
Your business succession planning should involve creating a plan to reduce and minimize the dependency on you for daily operations.
2. Staff
Develop your staff to take on day-to-day operational responsibilities. Cross-train staff members and, if possible within your exit planning timeline, develop supervisors and managers. If you are regularly involved in the day-to-day operations, staff training is an essential part of a successful business exit strategy.
3. Operational Infrastructure
In preparing to sell your business, develop systems and procedures for your day-to-day operations, review how your business operates, and improve your systems. This is an important part of transition planning for business owners.
4. Customer Concentration
If your business has high customer concentration, work toward diversifying your customer base through geographic expansion, customer growth, or expanded service offerings.
For niche businesses where diversification is limited, your business exit strategy should focus on cementing existing customer relationships as much as possible.
5. Financial Statements and Tax Returns
Review your financial statements and tax returns with your CPA. Ensure the owner’s salary, benefits, and expenses are clearly identified and meticulously tracked, as you will be required to prove these expenses to a prospective buyer after an offer is accepted.
Having this information readily accessible greatly simplifies the buyer due diligence process.
6. Tax Strategy to Minimize Taxes on the Business
If you’re preparing to sell your business, your business exit strategy should include meeting with your CPA to develop a proactive tax strategy for the sale. This can lead to substantial savings on your taxes.
There are several tax strategies to minimize and defer taxes when you sell a privately held company. If your current advisor does not specialize in exit tax planning, we can refer you to a qualified professional.
7. Performance
The financial performance of your company, namely: net profit, discretionary earnings, sales, and growth, is the biggest driver of value when planning a business exit strategy.
There are more complex company valuation methods and value enhancement strategies, but broadly speaking, every dollar you add to your bottom line adds two to three dollars in business value. For example, if you increase your bottom line by $20,000, your business value will increase by $40,000 to $60,000.
Learn More With Pacific Business Sales
Above are the basic elements of an exit strategy for a small to medium-sized business. For a more detailed discussion of each item, please refer to our merger and acquisition advisory blog, “How to Develop an Exit Strategy to Sell Your Business.”
FAQs
What is a business exit strategy, and why does it matter?
An exit strategy is a structured plan to maximize your company’s value before a sale. Starting early improves operations, reduces owner dependency, and increases profitability, making your business more attractive to buyers.
When should I start preparing to sell my business?
You should start preparing to sell your business as early as possible. Even if a sale seems distant, strategic exit planning builds value over time. Waiting until you’re ready to sell limits your options and often results in a lower sale price.
What are the key steps in a business exit strategy?
A solid exit strategy typically addresses seven areas: 1) Reducing owner dependency, 2) developing staff, 3) improving operational infrastructure, 4) diversifying your customer base, 5) cleaning up financial records, 6) creating a proactive tax strategy, and 7) boosting net profit. Each dollar added to your net profit can increase business value by $2-$3.
How do financial records affect my exit strategy?
Clean, accurate financials simplify the buyer due diligence process and build buyer confidence. Clearly documented owner expenses, salary, and benefits are essential. Buyers will require proof of these figures after an offer is accepted.
Can Pacific Business Sales help me develop a business exit strategy?
Yes. Pacific Business Sales offers expert guidance on exit strategy planning for small and mid-sized companies throughout California. Our brokers have successfully sold hundreds of businesses and can consult with you through every step of the process.