We have outlined three different methods to consider when you think about your exit strategy – maximize price, maximize continuity, and maximize legacy. We will now take a deeper dive into each strategy and how you can approach thinking about each one.
We start with the strategy that might first come to mind when we think about selling a business – Maximizing Price. You should consider this strategy if you do not have a strong desire to pass the business on to heirs or internal successors, if you need a significant amount of value out of your business to retire comfortably, if you are not concerned about how the business progresses after you sell and if you are attracted to a clean break from the business.
If these factors lead you to pursue the Maximize Price strategy, you should first consider how to build the valuation of your business so that it is most attractive to a buyer. Most buyers value a strong balance sheet, a multi-year history of profitability, up-to-date systems, processes and equipment, and a clear path to grow the business with added capital. You will need to carefully consider how to balance reinvestment into your business for future growth with the need to build a strong cash flow record.
On the personal side, you should begin to envision your life without the business well in advance of your plans to exit. A Maximize Price strategy is usually a more immediate cash-out event than an internal or family succession plan, so you need to emotionally prepare for life without a business that you have spent decades building. You may even want to lay the groundwork for what you will do next and should set aside time after the sale to take a break, recharge and reflect on an important era of your life that is now in the rearview mirror. This can be a more emotionally trying time than you expect so it is good to allow space to process and, even to some degree, mourn the sale of the business.
You should also be sure that you are in a good personal financial position when projecting the sale of your business. You do not want to realize after the fact that you do not have adequate financial resources to support your lifestyle post-ownership. There are many ancillary personal financial benefits that come with owning a business (company car, health insurance, club memberships, life insurance, etc.) that you will need to factor into your financial needs analysis. Taxes are also a major factor in this type of exit, especially when you receive a large payout up front. Multi-year tax and estate planning are vitally important when planning for your exit to maximize the after-tax value of the transaction.
The Maximize Price strategy is attractive financially but be sure to carefully consider this approach before diving in head-first. The types of buyers who pay top dollar for private businesses may employ a much different strategy to maximize future growth, and this change of strategy will have a ripple effect throughout the business. Make sure you are prepared to let go of where the business heads after you are gone to minimize potential future regret.
In conclusion, optimize your company’s financial position, plan for time after the business, plan for adequate funding of your post-business life and prepare emotionally for your exit.