Steps to take now – whether you hope to leave your business in three years or 30

Last week’s featured outlined some of the steps you should take to move on from your business successfully – whether retirement or the sale of your business is in your short-term sights or longer-term plans.

Here are four more activities you can begin right now to make a graceful – and financially rewarding – exit from your business.

Get your books and building in order. Most businesses are operated to minimize reported earnings. To a buyer, this may make it seem like the business is overpriced. Former shop owners who have successfully sold their businesses say there is little as important to making a sale successful for both buyer and seller than having 3 to 5 years of very clear, accurate and complete financial records. Cash sales that aren’t recorded, for example, or personal expenses identified as business expenses will only hurt the seller, they say.

“If you have a real good performing shop and they use a multiplier of five (times the company’s earnings) in determining the value, that $12,000 in cash sales you pocketed last year just cost you $60,000 off the selling price of your business,” said Dan Bailey, chief operating officer of CARSTAR, who joined the company after selling his family’s collision repair business to CARSTAR a decade ago.

Most buyers have an idea of the types of equipment they’ll want to have to operate the shops they acquire. So while the primary reason to buy and maintain good equipment is to help you generate revenue, it can also help improve the value of your business. Selling or disposing of unnecessary equipment or other assets can also simplify the valuation and sale. Even maintaining such things as landscaping, parking lot striping and sealing, and interior ceilings and lights can improve the value and salability of the business.

“And make sure the shop’s office technology is updated,” Bailey recommends. “Not having up-to-date computer hardware and phone systems, a shop management system, and high-speed data lines can make a difference of one-half to a full point in the multiplier.”

Think about how to structure a sale. Someone wishing to buy your business is likely to offer one (or a combination) of three things: cash, payments or stock. Which of the three you should accept is largely driven by a range of factors: your tax and cash situation, how quickly you need to sell, whether you’re selling to a relative or outside party, etc.

Obviously, a cash sale offers the least risk, and provides the means to cover your tax obligations, which may be upfront in any sale. Most buyers, however, will have difficulty lining up enough cash or financing to cover the entire cost; carrying a contract for some of the balance offers you potential interest income in exchange for taking on some risk.

A buyer may also offer you “stock” in the larger company they are creating with the purchase of your business. This isn’t an option Bailey recommends; if the buyer’s company fails, you’re left with worthless stock.

“I would not sell a business for less than 50 percent up front in cash, and I wouldn’t take any stock,” Bailey said. “You’ve worked all your life to build that business to where it is, so you need to get paid for it. If you get 50 percent up front, a 10-year lease at market rates, and a clause that if they don’t fulfill the contract, the business and assets come back to you, the worst that can happen is you’d have to go back to work or resell the business again. But in the meantime, you have a chunk of cash up front, the interest on any payments they’ve made, plus your lease payments.”

Develop a team of advisors. There’s obviously no shortage of legal and tax issues associated with selling a business, so it pays to have an experienced attorney and CPA or tax advisor to assist you. The longer you’ve had relationships with these advisors, they better they will understand your business and personal goals. But also keep in mind that your current CPA or attorney may not have experience with business transactions, so it can pay to ask them to bring in outside help.

Also ask any business brokers you are considering about their experience with sales of businesses such as yours. And remember that while a broker may be able to help you determine an appropriate selling price, not all have had formal appraisal training or certification, and their valuation may be influenced based on their interest in selling the business.

Plan for the unexpected. Lastly, it’s important in your exit strategy planning to prepare for some unexpected or worst-case scenarios. Make sure you have adequate life or disability insurance, for example, to help you or your heirs in case you are forced to exit your business unexpectedly. Create a will and make your wishes and plans known – in writing – to help avoid family or legal squabbles from destroying the business you’ve worked so hard to build. And don’t rely solely on your business as your retirement nest-egg. Develop a plan – and savings – that offers you some options as to when – and for how much – you sell and exit your business.

John Yoswick, a freelance writer based in Portland, Oregon, who has been writing about the automotive industry since 1988, is also the editor of the CRASH Network (www.CrashNetwork.com). He can be contacted by email at jyoswick@SpiritOne.com.