Exit Planning: What Is It Worth to You?
3 Min Read By Connie Kelly
When it comes to business, restaurant owners recognize the importance of both planning and taking action, but the average business owner rates exit planning as a lower priority compared to other business-related needs. "I'm too busy," "I've got other pressing issues" or "I'll do it when I'm ready to act" are just a few common replies.
When it comes to exit planning and business strategy, planning with the end in mind will impact every decision you make going forward in a positive way.
One of the most concerning responses is: "I won't have a problem selling, I know several people who want to buy my business." This mindset indicates an owner that has put a lot of faith in a few random conversations, which most likely didn’t include a discussion of price, terms or any other detail on negotiating a business sale. These types of deals rarely, if ever, come together and certainly shouldn’t be considered as a plan for exiting your business in the future.
So, if you’re a restaurant owner who’s thinking about selling where do you begin? The planning begins with a valuation. A valuation will provide feedback on a most likely sales price (MLSP) for the company. The process, while more of an art than a science, considers the present state of the business, the financial history, an industry review and several other business-related concerns.
What usually surprises a first-time business seller is how tough the marketplace can be. As a seller, the odds are actually against you from the start. Statistically only two out of 10 businesses listed will ever sell. The ones that don't sell are transferred in some form or fashion, perhaps handed down in a "generational transfer" or they cease to exist, by closing or liquidating. For a business that does sell, there’s still a great amount of time involved in managing a transaction. The current national average of time on the market is 9.3 months, from beginning to close of escrow.
Sellers will get a glimpse into how savvy business buyers can be. The marketplace offers them many options to choose from, they typically do a lot of research beforehand, and most buyers are determined to see good ROI so they scrutinize every detail. A seller that goes in negotiations unprepared will likely find themselves in difficult and frustrating negotiations.
For the business owner who is not thinking of selling anytime soon, but wants to position their business for a future market, plan with the end in mind. When it comes to exit planning and business strategy, planning with the end in mind will impact every decision you make going forward in a positive way.
While no two businesses are exactly alike, here are some general areas that benefit from exit planning:
The financials are a major consideration in any business sale. Exit planning will provide an opportunity to review and evaluate a financial strategy for the future. Buyers and sellers look at a business very differently, exit planning needs to reflect that. Some additional related topics to consider may include buyout packages, buy-sell agreements and insurance policies used to ensure business continuity.
Exit planning can help fine tune a company's leadership strategy. Business buyers are drawn to strength. They’ll pay huge sums for a successful and well-run business. Buyers look for a financially healthy business that has had strong leadership and a good reputation in the community. A strategy and a business plan can help a company create or reinforce that reality.
Exit planning provides an opportunity to review and fine-tune the operational efficiency. A business that is well-run, growing and prepared to navigate leadership change is very attractive to buyers. A plan for future exit, one that focuses on the strengths of the business, will add value, increase the level of buyer interest and also help ensure a smooth transition when the times comes.
Industry experts have estimated that as many as 79 percent of business owners want to leave their business in the next 10 years. Since successful exits typically require a set of actions that most business owners may not be aware of or prepared for, such as steps to improve value, increase potential for transfer and prepare for due diligence related issues, etc., it's never too early to begin the planning. Some recommended processes can take a great deal of time to implement. So as they say, the two best days to prepare your business for an exit is your very first day in business and today.