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Darren GradyByDarren Grady

Strategic Exit Planning – Discover 7 Costly Mistakes to Avoid

Tips to Protecting Your Wealth

As Arizona Business Brokers, we understand the ultimate goal for business owners is to get the maximum value upon the sale of their business and to reap the reward for years of hard work by funding all or part of their retirement.

Did you know, according to UBS (NYSE: UBS) Q1 Investor Watch Report 48% of business owners do not have a formalized exit strategy, 

In addition, 88% of small business owners had no written plan to transition from the current owner and of those 66% had no plan at all.   

As a result, they leave one of the most important financial decisions of their lives to a game of chance… Unfortunately, for many this lackadaisical attitude  tends to stack the deck in favor of the Buyer when it comes time to sell.  

So the real questions might be, why do so many smart business owners neglect to plan for one of the most important  financial transaction of their lives, and unfortunately find themselves in a position where the business will not sell for it full market value? 

Below are a few tips to help you successfully exit your business on your terms by attracting the best and most qualified Buyers, specifically Strategic Buyers and/or Private Equity Groups.

1 Don’t Make the Success of the Business All About You.

When developing a strategic exit plan for a small business, it is important for the owner to define his day to day role in the business.  It is also important to understand what type of leader you are.   For example, are your the CEO (the Visionary_ or the President (the Implementer or the vision). 

Defining roles and delegating less critical day-to-day duties to staff will reduce the Buyer’s risk assessment and dependence on you – the owner – after the sale.

A better approach is to create an honest assessment of where you’ve been, where you are now and a vision of where the business is heading.

 From the 50,000 foot level, take the time to pull away from your business, as if you were doing a self diagnosis of the past years or decades of work.   This is your life’s work, and don’t wing it here, layout a overview of how all the parts of your business connect into a viable and profitable operation, because this is what you’re really selling.

 2. Don’t Lose Sight of the Customer Valuation Multiplier.

Do customers buy from the business, or do they do business with you – the owner.   This is a biggie…  Many small business owners built their companies by being directly on the front line building customer relationships and driving sales growth.  If this is you, you are the business, at least in the mind of the Buyer – therefore the risk and uncertainty of revenue loss after the sale, will impact the saleability of even a successful and profitable business.

A Better Way is to Create a Clear Understanding of Your Ideal Customer Profile, and Break Down Marketing, Advertising, Sales, and Follow Up Processes.

Buyers will want to understand how well you know your customers. In addition, mapping out the customer journey from new prospect to loyal repeat customer will reduce risk in the mind of the a qualified buyer.  

Buyers will ask you to the define your competitive advantage, and what specifically sets you apart from the competition, 

Be ready to answer answer the following questions…

Why should I do business with you, buy your products and/or services from you, as opposed to any and all other competitive options in the marketplace, including doing nothing?

  • Why do customers buy from you?

  • Why do customers buy from your competitors and not you?

  • Why do some potential customers not buy at all?

  • What needs to be done to be successful in the future?

Remember that customers buy benefits, not features. When describing your value proposition, it’s easy to get caught up in talking about you.

3.  Don’t Make the Mistake all Buyers Understand Your Business and Market as Well as You Do.

The world has changed, and doing business in a increasingly fragmented and niche specific world, Buyers will want to understand where future business is coming from, specifically after you walk out the door for the last time.  In addition, Buyers will want to dive deep into understanding  the market as well as potential disruptive threats to future growth.  

  • How big is the market?

  • Is there a built-in demand for what you’re selling?

  • Who are your largest five customers, and what percentage of the annual business revenue do they each represent?

  • What’s your current market position: Including any strengths, weaknesses, opportunities or threats?

  • Who are your competitors? What are their strengths, weakness, opportunities and threats?

4.  Don’t Make the Mistake – All Sales are Created Equal.

All sales are not created equal, and provable recurring revenue streams tend to provide a much higher valuation multiple for the Seller of a business.  And, nearly all small businesses have the potential to generate a recurring revenue stream using a few different business models.

Although the impact of recurring revenue varies by industry and business model, there are several reasons why buyers are willing to pay more for companies with established recurring revenue streams.

  • Revenue and Cash Flow – Buyers can count on recurring revenue right out of the gate. With guaranteed cash flow in their corner, they sleep a little easier knowing that they can repay loans and meet other financial obligations.

  • Predictability and Stability – Businesses with recurring revenue are more predictable than other business opportunities. Owners forecast revenue months in advance and create budgets with a higher degree of certainty.

  • Reduced Risk and Growth Potential – Recurring revenue streams serve as a buffer for income fluctuations. As a result, these businesses are less risky and present more opportunities for growth, especially if the buyer believes she can grow recurring revenue in the future.