What business owners should be thinking about ahead of an exit

The choice between the sale or succession of a business comes down to the philosophy of the owner. Some owners want their company to have a next chapter, others might want to cash out and get the most money they can from a sale, and others want to see their business stay in the family and be carried on by the next generation.

Once the philosophy is determined, then an owner has to follow through by investing in a management team, prepping the business for a sale and taking it out to market, or grooming a family member to run the business, all of which require time and a plan.

But selling a business isn’t just a financial transaction. It also ushers in a major lifestyle change, which is something not every business owner considers as they consider their exit strategy.

“Owners who sell and retire with no plan for how they’ll spend their time inevitably run into trouble,” says Sam Agresti, director of Brady Ware & Company.

Smart Business spoke with Agresti about how business owners should prepare their business and themselves for an exit.

When should business owners start planning for an exit from their business?

Ideally, business owners want to cultivate a culture of transition, which is a perpetual undertaking and involves consistently moving people up through the system via career paths wherever possible. Those who have only recently come to the idea of exiting their business need to begin honing a plan over the course of three to five years before its execution. To do it in less time is possible, but it will likely have a negative impact on the business’s value.

How should business owners prepare the next generation for succession?

Business owners should focus on housekeeping. Review how the entity is structured and all of the outstanding contracts and ensure that everything is documented correctly. Also review any employee agreements, such as contracts and noncompete agreements, that exist to make sure key employees will stay with the business where possible post sale.

Owners should take a hard look at what they’re paying themselves and how that affects the books. Get the company’s financials cleaned up in that regard so that an audit will produce a three- to five-year history that reflects the true operational costs of that company. It’s best to get certified statements because the better quality the financial statements are, the more the owner gets out of the business.

What needs to be done to prepare a business for a sale?

Preparing the business for a sale is similar to preparing the business for succession. The main difference is that when an owner is selling the business, there’s more of a short-term horizon on any capital expenditures. Decision-making is also more focused on the short-term. That means not investing in a new machine or computer system upgrade, because that investment will outlast the owner’s targeted exit date. Rather, try to drive bottom-line growth with each decision.

Also, take a look at the facility itself and do whatever work is required to affordably get the structure and the grounds looking as presentable as possible.

What considerations should business owners make regarding their post-exit lives?

Owners typically put a lot of thought into the financial aspects of post-exit life, making sure they’ll have enough money to afford the life they want in retirement. But many don’t think through what exactly they’re going to do day in and day out, and that’s important, because former owners will suddenly have a lot of time on their hands. It’s something owners should consider as they form their exit plan.

Who should business owners work with to prepare themselves and their business for an exit?

Put an advisory group together that consists of an attorney, accountant, financial planner and a business consultant who specializes in exits. A consultant will help owners prepare for an exit not just financially, but by helping them determine what their future looks like when they’re no longer running a business. Look for consultants who see the transaction as much from a human perspective as they do a legal or financial perspective.

Insights Accounting is brought to you by Brady Ware & Company