Exit planning for business owners

What the planning covers

Exit planning is the work an owner does before a sale to decide what the sale must achieve, to learn what the company is worth today, and to close the gap between the two while there is still time to do so. For a founder-owned company, the most useful exit planning begins long before a sale is on the calendar, often while the owner has no intention of selling.

It is not a single document. It is a set of decisions about the owner, the company and the people in it, made in an order that leaves the owner free to act when the right buyer or the right moment appears.

Start with what the owner wants

A sale answers personal questions as much as financial ones. How much does the owner need from the proceeds, after tax and debt, to do what comes next? Does the owner want to leave entirely, stay on for a period, or keep a share of the company and a role in it? Does it matter who the buyer is, what happens to the employees, or whether the company keeps its name? The answers decide which buyers fit and which structures are worth considering, so they come first.

A full sale is one answer among several. Some owners want liquidity without giving up control, and a minority investment or a majority recapitalization can provide part of the value now while the owner keeps a stake in what follows. Planning a sale well means pricing those alternatives beside a full sale rather than discovering them late.

Learn what the company is worth today

The plan rests on an honest figure. A buyer prices a small company on its earnings for the owner, multiplied by a number that reflects risk, so the useful questions are what the earnings are once personal and one-time costs are added back, and what in the company raises or lowers the multiple. The estimate at how much is my business worth gives a first range from published sale data and the owner's own figures, and how a business is priced sets out the arithmetic.

Wild Rose Advisors provides a written assessment of value with its assumptions stated, at no cost and without obligation. If the figure today is below what the owner needs, the gap is the plan. If it is above, the plan is about protecting it and choosing the moment.

Make the company ready for a buyer

Much of the value in a founder-owned company is not visible to a buyer underwriting it. The firm's valuation and readiness work makes it visible, addressing four priorities in the order a buyer tends to price them:

• The recurring base: which work is contracted, at what frequency and price, and how reliably it renews, shown in a schedule a buyer can verify.
• Customer concentration: the share of revenue held by the largest accounts, which takes time to reduce and little time for a buyer to find.
• Operations: moving the business out of the owner's head and into written procedures, so the company can run without the person selling it.
• Market presence: a company that can be found and verified, which also shows a buyer that customers do not all arrive through the owner.

Each of these takes time to show in the financial statements, which is the strongest argument for starting early. Work done just before a sale is described to a buyer as a promise; work done well before it appears in the results as a fact.

Settle the financial and legal questions early

Several questions belong with the owner's own accountant and attorney, and they are cheaper to answer before a buyer is involved. Whether a sale is structured as an asset sale or a stock sale changes the owner's taxes materially. The books should match the tax returns, because buyers read one against the other. Licenses held in the owner's name, rather than the company's, need a plan for how they continue after closing. Leases, key contracts and employment agreements should be read for clauses that a change of ownership would trigger.

Personal planning runs alongside: what the proceeds are for, how they will be held, and what the owner's estate plan assumes about the company. None of this requires a buyer, and all of it is harder to do under the deadline of a letter of intent.

Prepare the people

A company that depends on its owner for every decision is priced as a risk. The plan should name who runs each part of the business without the owner, and whether those people are likely to stay through a change of ownership. Key managers under agreement are an asset in a sale; key managers on a handshake are a question a buyer will ask. Retention terms for the few people who matter most can be agreed in confidence, well before the rest of the team hears of a sale.

Choose the timing

The right time to sell is when the company, the market and the owner are all ready. Planning a sale is the work of bringing the company and the owner into line, so the owner can act when the market allows. Rising results, a documented recurring base and an owner with energy left for the transition all strengthen a sale. Selling under pressure, after a decline, a health event or a dispute, removes the option of waiting for the right buyer.

Once the decision is made, how to sell my business walks through each stage of the sale, and how long it takes to sell a business describes what makes each stage longer or shorter.

Common questions