Many owners fail to develop an exit plan for their small business, which is a huge mistake. You should develop an exit plan for your business right from the very beginning.
Having an exit plan in place will help you keep the business going in the right direction by constantly aligning with your long-term goals. An exit plan also creates a trigger event that means it is time to get out; otherwise you just keep going.
One thing is for certain: Your exit plan will change over time, so make sure to review it often. I suggest writing your exit plan down and then reading it every six months or so; as it changes, make updates to it.
Below are 8 steps to prepare your small business for an exit.
1. Sourcing Buyers
One thing businesses fail to think about is finding buyers for their business. Most owners just assume someone will want to buy their business, which is a huge mistake. According to exits.com, "Only 25% of saleable companies exit."
Keeping a list of potential buyers is a critical piece of your exit plan. Prospective buyers can be individuals or businesses who have approached you in the past about acquiring your business. You should also keep a list of competitors who may be interested in acquiring you when the time is right.
Sourcing potential buyers of your business and keeping a list of them will come in handy when the time comes to exit.
2. Reoccurring Revenue
Revenue is an important piece of your business exit; not only how much you have of it, but also the form in which it comes into your bank. Subscription-based products and services that produce reoccurring, predictable revenue are attractive to potential buyers.
Another smart thing to do with your revenue if possible is to bill automatically, in advance. If all of your revenue is set up as reoccurring payments on the 1st of each month for that month's service, you will have a very attractive business to acquire.
A business with reoccurring, predictable revenue that is billed automatically and in advance is very attractive to a buyer.
3. A Good Growth Pattern
Obviously, having a business that has shown good growth patterns is what you are aiming for and what acquirers will want to see. Steady and predictable financial growth is the goal.
You may have some dips in your growth patterns here and there, but as long as they can be explained with an acceptable answer, you will probably be OK. What a buyer does not want to see is erratic swings in your growth.
Solid, predictable growth is attractive to a buyer.
4. Standard Operating Procedures
If you don't have a set of detailed standard operating procedures that are written down, you need to develop them right away. Build your business to the point where, if you get hit by a bus and are killed, your business will move forward without any disruption.
You really want to detail everything in your standard procedures, including but not limited to:
• Executive strategy, vision, mission, core values, and management practices.
• Marketing plan--The strategy and tools used to attract prospects to your company.
• Sales plan and procedures--What tools and processes the business uses to convert prospects to customers.
• Operating procedures--Detailed processes of how the business works day in and day out to deliver to customers.
Think about it: If you are looking at two companies to acquire with similar revenues and other characteristics but one has a written set of standard operating procedures and the other does not, which one will you purchase?
5. Something Proprietary
Buyers love to invest in or acquire a business that has something proprietary. That doesn't necessarily mean you have to have a patent on something (although that is huge).
You could just have a certain process that is unique. In his brilliant book Built to Sell, John Warrillow explains, "You should name and own your process."
If you have anything that is exclusive to your business, make sure to highlight it as it will be a big selling point.
6. Good Bookkeeping
Nobody, and I mean nobody, gets acquired without a good set of books. I was at a Goldman Sachs 10,000 Small Businesses alumni event when someone asked the business broker for his advice on exiting a business. The broker had already had a successful exit and he said, "Keep excellent records right from the beginning."
Many small business owners struggle with accounting and bookkeeping. Don't do what you don't know. Finding a good outsourced bookkeeping services company to help you keep solid records will prove vital to your growth and exit.
If you are going to exit, you will need a good set of books that have been audited regularly; using an outsourced bookkeeping service is recommended.
7. An Owner Who Is Removed
This may sound crazy, but if you are going to exit, you need to remove yourself from the business. If the business is only doing well because of you, then you will significantly decrease the value of your business.
If you, the owner, are vital to the success of the business, nobody will want to buy you or they will lock you into a long earn-out and make you stay involved for a predetermined amount of time.
8. A Solid Long-term Management Team
While a potential acquirer may want to get an owner out of the business, they will want to see a management team who is committed to the future. If it appears that most key employees have the option to leave after the sale of the business, then this will be a big negative to a buyer.
Put good employee contracts in place with your key management team. Rather than giving them equity in the business, give them a bonus in the event of the business being sold and terms that allow the bonus to be paid out over a year or two.
If you are planning to exit your business at some point in the future, don't just assume that someone will want to buy your business. Increase your chances of success by following the above steps and reviewing your exit plan on regular basis.
Have you ever successfully exited a business?
What advice do you have?
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This blogger graduated from Goldman Sachs' 10,000 Small Businesses program. Goldman Sachs is a partner of the What Is Working: Small Businesses section.