Building an Exit Strategy

All good things must come to an end, right? Sometimes, when we think about leaving or going away, we think of it as a bad thing, but in the world of selling businesses, leaving can mean leaving a company and heading straight for the bank. Leaving can mean you finally did what you set out to do – have a business that’s successful enough to gain wealth.

It’s a good thing. In fact, it’s a GREAT thing, but this great thing can easily turn sour if done incorrectly.

On today’s episode of Deal Closers – A Tech & Internet M&A Discussion, we’re talking about exit strategies, and Jason and Ron from WebsiteClosers.com share with us which one is the best for you, depending on what you wish to do after selling your business.

Types of Exit Strategies

Exit strategies may look different for everyone. These are just some of the possibilities and types of exit strategies to look into:

• It could be personal in nature (succession plans).
• M&A. Partnering with another group to help them grow.
• Initial public offerings (IPOs). Go public — take the business out into the public market.

Communicating Your Exit Strategy

When you’re building an exit strategy, you have to decide what works for you personally. It’s not just about the business decision and its economics.

It’s all about you — you could have an illness, or you could be selling the company on behalf of a family member, and you have no intention of staying in the business.

But what you need to remember is that even if you want out, buyers will always be looking to have you stay in the business for a while.

Preparing Your Business for Exit

Ask yourself this question: “What is my involvement going to be?” Considering the role you play in a deal will help you come up with an exit plan.

When thinking about how to build an exit strategy, consider that some companies have more than one owner. In other words, everyone — every key player — needs to be on the same page when it comes to the exit plan. What if every owner wants out since they’ve been in this business for a long time? 

In this case, Jason recommends talking to firms such as WebsiteClosers.com to get a feel for what some sellers do so that you can get an idea of what works best for you. Getting advice from experts is a good starting point for successful exits.

Key Components of a Successful Exit Strategy

• Your level of involvement after closing. A seller will always end up with a better deal when they stay with the company to guide the new owner. If you simply want to walk away after the end of the deal, the multiples will be lower. If you stay involved and take the opportunity to continuously grow the company, you will achieve a higher multiple and every potential buyer will become more interested in the deal.

• Establishing a strong infrastructure that can operate on its own after you exit your business. It could mean:

• Putting a controller:
• Establishing a sales team
• Putting together a marketing team
• Hiring developers from platforms like Upwork

Industry-Specific Considerations

Tech Companies

Tech companies tend to have people who take the role of the brains of the operation. It’s one of the differentiating factors between selling a brick-and-mortar vs. selling a tech company — which is more akin to selling a law firm or accounting firm. 

The buyer needs to take in all the knowledge that the seller has. With the assistance of a business broker, the seller will gain insights into developing an exit strategy that works for this scenario. The bigger the deal, the more the buyer will want the seller to be involved in a smooth transition process.

The Role of Professional Advisors

Generally, what we coach our clients is that part of building exit strategy is to be prepared to spend a year with the buyer. After you sell your business, you’ll be highly involved during that one year and will be incentivized. This typically involves the buyer encouraging the seller to roll over some equity. They will then exit from that piece down the road.

According to Ron from WebsiteClosers.com, business brokers “package” companies to get them ready. This is done by:

• Looking at financials.
• Determine whether their tax returns are easily decipherable.

While the goal is to see the business come to market sooner, Ron and his team don’t always encourage this because some businesses are just not ready yet. In this case, Website Closers helps lay down a long-term strategy. Since they’re also in the business of selling businesses, their goal is to maximize the commission by helping the company become more profitable.

Common Pitfalls to Avoid

It’s common for business owners to assume they’ll have to report to a boss and feel hesitant about agreeing to stay involved after closing. But this is not how it works. 

The reality is that everyone sits down, gathering on a whiteboard to work out what the next few months or next year will look like. They discuss action items about how to develop a company beyond what it is today.

Another common mistake is that, despite being incentivized to stay, sellers often continue handling the same tasks they did before, instead of delegating those responsibilities. What the buyer brings to the table is finding out the operational roles that the seller doesn’t like and putting someone in that role.

Small Business Exit Strategy Mistake

When you start as a small business owner, you can write off a lot of things on taxes. But what you don’t realize is that down the line, it could be hurting the sale of the business.

A business should be sold on an accrual basis because it shows more profit for high-growth companies. Start thinking about the best time to pay your taxes so your tax return accurately reflects what you’re actually making.

If the deal is less than $5M, the company needs to go SBA because that’s where all the money is. In this particular scenario, the tax returns need to be checked.

If you’re writing things off, you cannot plan for an exit. You can come to business brokers like Website Closers for advice on how to make adjustments to your tax returns if you want to start planning for an exit.

Steps to Develop an Exit Strategy

• Think about these questions:

• “How do I sell my company?”
• “How do I get to the point where I’m thinking about what it’s going to look like to sell my company?”

 

• For those who can’t answer the second point, it might be best to stick around with the new owner rather than make a complete exit. It could be a whole new world for you.

• Part of the process is to think about the long-term partner and what the longer-term initiative looks like.

• Think about what’s outside the economics of the deal when creating an exit strategy. What will you be doing after the deal?

• If you’re thinking about building wealth, part of your exit strategy should go beyond being a business owner. You need to become a serial seller of businesses.

The Bottom Line

Exit strategies are so important. Without a good exit plan, you might close a deal and end up losing money or missing out on the money you could’ve gotten. It’s something worth thinking about early on in company ownership.