If you are a business owner, someday, likely sooner than you anticipate, you will be faced with what to do with your business. The baby boomer bubble of business owners (business blog alliteration...it takes work), some seven million of them in the next fifteen to twenty years will have this opportunity.
Knowing that, what are the potential choices?
It is a viable option to simply close the doors. Hopefully it's not the best option, but it is an option. When the lease runs out, or the contract ends; the exit strategy is to not renew the lease or accept a new contract, pay the vendors, collect the cash and call it a day. However, if you have a client list, inventory, assets, or employees; there are most likely better exit strategies which provide you with some return for your years of sweat equity.
Another option is to sell the business to someone or someones that are in the business working with you. If that is your child - well, you know that children never have any money...that starts when they are born, accelerates in college, and is sustained throughout their adult lives via grandchildren. Children are not a financial decision and what they are able to pay at the closing table would likely be less than the market value of the company. Again, children are not a financial decision but a successful exit may not require a bunch of cash at closing - in fact, that may be undesirable.
What about a business partner or all of the employees creating an ESOP; employee stock ownership plan? It's a way to craft an exit and to pass the reigns to people that you know and in whom you have developed trust. I'll talk more about ESOPs later. I'm not a big fan, but they have their place. If you have a partner, your buy/sell agreement specifies the terms upon which one member can exit and another to buy his stake. Generally, this value will be less than total market value but, relatively speaking, it's a straightforward, ready made transaction. You have reviewed and updated your buy/sell agreement in the last year, right?
Those are typical of what I call, 'internal transactions'. Everyone inside the organization likely knows which suitcase holds the dead bodies.
An external buyer of your business doesn't know which suitcase, or even about the dead bodies when he meets you, and may not know when he agrees to buy your company, but for absolute certain he will find them. Let me suggest that as part of your exit strategy, you do your own honest assessment of your business. From this assessment determine those deficiencies that you have been trying to ignore and diligently fix them.Some dead body examples that I have run into:
- Inventory that is 23 years old, has zero value and is on the books for full value...write it off. I can promise you that the old inventory when discovered is akin to the camel with his nose under the tent in the due diligence process.
- If it's illegal - don't do it. An invoice that gets paid should be for goods delivered or services performed. If that's not the case, I hope that I find it before the buyer does.
- If, as an owner, cash out left the company for your personal expenses and somehow the taxes just didn't get paid on that amount...that's between you and the IRS; but for every $1 that that activity reduces in profit - as a rule of thumb, that will cost you $4 at closing. It's not worth it and I won't fix it when your company gets devalued.
- Last one, realizing that this list could be a whole separate entry; that tax lien from 2006...let's just go ahead and pay it to get that off the books. That's a red flag that sends buyers running from the room screaming.
Knowing that there are different exit choices, strategies, and objectives is reassuring, right? If the desirable choice is an external transaction...a clean shop, with sound business processes and accurate books and records makes that process immeasurably less...susceptible to suitcase suicide if you are in that baby boomer business bubble.
