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What Is The Exit Stage Of A Business?

What is the exit stage of a business?

Selling a business can be the single most important decision of an entrepreneur's life. But it's more than just making the decision. It's an emotionally charged, often intensely personal matter for you, the entrepreneur.

Your business is typically the single largest element of your asset base and estate, often with both real capital tied up and huge amounts of sweat equity invested. And it's probably been the center of your life. You've built relationships with partners, employees, and customers that are nearly family-like.

Often, it's not just a company created, but also a culture. It not only has your imprint, but the blood and sweat of partners, employees and, perhaps, your immediate family.
But with all this at stake, few entrepreneurs ever plan their exit.
Typically, they first really begin to think about it when a prospective buyer approaches them. Or worse, when external pressures, like health, family or partner problems force the issue. And even those that do some planning for their exit find it can be an overwhelmingly complicated decision with layers of questions to be answered before beginning to move ahead and still more to consider once you do.

With this post, we will help you to understand better and answer critical questions regarding the exit stage of business. In future posts, we will assist you through the subsequent phases of the process to, hopefully, a potentially successful sale.

Why Do It?

Why consider selling? Have you been approached by a prospective buyer or merger partner? Is there expansion or capital issues needing a larger partner with deeper pockets, more infrastructure, and greater reach?

Does it seem time to "cash out," get your estate in order or have you simply "had enough" and want to move on to something new? Have you taken the company as far as you believe you can, given your management capabilities?

Are you intrigued by another business concept that you want to develop? Are you weary of the financial pressure or employee issues and want a "partner" to take on that burden?

In short, there should be a specific reason or reasons to sell. Reasons lie in answers to any one or some combination of the previous questions ...or even some other consideration such as a major conflict in a family-owned business. Simple or complicated, weighing these is a crucial first step in the process. Whatever your rationale, it is the foundation of the decision.

Is your exit strategy realistic?

What Are Your Expectations from a Sale? Are They Realistic?

The question then becomes how to put a realistic value on the business? Remember, "there are no ugly children," in the eyes of a parent, and "beauty is in the eye of the beholder." Can you objectively arrive at a value? Have you researched selling prices of comparable businesses in your market sector are receiving? Do expectations far exceed those multiple of revenues or valuations?

And a word of caution about valuation. It can become not unlike the dollar figure of a contract for a professional athlete - a "scoreboard" for value, the "number" you can flaunt to other members of the club or a trade group meeting.

However, while acknowledging that the maximum selling price is a prime objective, this isn't just about getting a rock-solid valuation. It's truly about what you get to actually "keep" after taxes and professional fees, regardless of how much you sell your company for and when the sale takes place.

Whether you plan to stay on with the company or move on after a sale, there is a myriad of options for payment that can have costly tax implications.

Getting advice, both professional and practical, is well worth it. Talk to professional advisors, particularly your lawyer and accountant. Talk to owners who have sold their businesses, both those who ended up happy and not so. Ask those from the investment banking community for their opinion. Consider getting a professional valuation done to get a baseline, realizing, however, that a buyer will only pay what they think the business is worth, not what an assessment claims it is.

Can You Live with the Result?

After establishing why you're selling and what you expect that sale to bring, understand the changes that typically stem from a sale - some good, some maybe, just okay.

The good results are real easy to identify. No more financial or personal pressure and all that that implies - richer personal bank account; capital available for growth (if you stick around), or maybe a short consulting gig or board seat before you "ride off into the sunset" (if you don't).

There could be new availability of management depth, perhaps international business expansion and an opportunity for more personal, professional growth (if you stick around), no more worries about benefits plans, supplier problems or off-shore price pressures (if you don't).

But how about the "just okay" results - actually the tradeoffs made for all of the positives you get?

First and foremost, for an entrepreneur, selling his or her company is akin to putting a child up for adoption. Harsh thought, perhaps, but the analogy holds. You have raised the "child" to this point, and you will always be your "child's parent," but now your company will have a new "parent" that will be responsible for and control its life! There are deep emotions tied to this notion. Consider them seriously.
If you stay, you will have a boss
Plus, you won't be "king" anymore. And we all know "it's good to be king!" If you stay, you WILL have a boss - someone to whom you will have to answer! Perhaps, many new bosses.

You will have less control over the company direction and the allocation of capital. And a new, different, maybe better, maybe worse, corporate culture will be introduced, and you'll be center stage in front of a new and highly judgmental audience.

The unfortunate consequences of not realistically considering the potential scenarios of a post-sale situation and thinking through whether or not you can accept what it might bring cannot be emphasized enough. Most disillusionment and unhappiness that have occurred in "bad sales" happened because those entrepreneurs only considered the plusses and glossed over what they could be trading for those good things.

Make no mistake; while there are sales that have worked out phenomenally well, there are always tradeoffs.

Why Should You Sell Now?

If you understand why you want to sell and fully accepted the implications of a sale, the next thing to consider is timing. And timing IS everything!

Your company's recent operating history as well as market conditions, both overall and in your particular industry, will drive both value and the timing of the sale. Have you just come off a couple of your best years ...or your worst? Is your industry sector suddenly "hot" ...or "stone cold?"

How have valuations in your industry and for related businesses been over the last six to twelve months? Is there some pressing need either for the company or you personally to consider a sale now?

An example would be a pending contract requiring a tremendous capital infusion or more infrastructure, on the business side. On the personal side, divorce, children's issues, either yours or a partner's, could be driving the need to sell.
During the exit stage most buyers will uncover why you're selling
Most buyers will turn over rocks to find out why you're selling

Again, answering some of these central questions will determine if the timing is right. Sometimes, there is no choice -a down market, personal pressures or health problems may force the issue. In virtually all cases, inadvertent timing will adversely affect valuation. Most buyers are reasonably astute and will uncover or discern your real reasons for selling, regardless of what you tell them.

If the business is coming off a bad year or two, and there is no overriding reason to sell, consider taking the steps needed to get your numbers back to where they should be before proceeding.

If the overall M&A market is soft, as it has been for the last year or more, realize that there will be buyers, just fewer of them, offering lower values. If valuations in your market sector are lagging behind those of other areas with which they've always been comparable, perhaps waiting another quarter or more will make far better sense.

In any case, timing will be a major consideration both for the possible buyers who might have an interest and the selling price you might receive. Some words of advice - it is always better to sell a little too soon...than a little too late!

Now it's decision time.

If there were questions you need to think more about or answers you didn't like, take the time to address each. If there's nagging doubt, or answers found that raised a whole other series of difficult questions, think about those some more and either talk to or bring in the experts.
If all other issues have been addressed, but the timing is wrong, for whatever reason, wait.
Selling your company is a decision that not only affects you, personally and professionally but your family and your extended family in your organization.

On the other hand, if you're satisfied that you've addressed and answered all of the essential questions, then the decision to proceed should be clear. Get ready to roll up your sleeves. The real work is just beginning. Now it's getting ready for "prime time," and creating The Plan. More on this in future posts.

Master Yoda knows these things. His job it is. May success be with you!

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