While you're busy nurturing customers, managing employees, and juggling finances, you may not be thinking of the day when you'll leave it all behind. But sometime this year, you owe it to yourself-and your business-to give serious attention to your exit strategy.
Ensuring an orderly transition isn't something you can do in a week or a month-or even a year. It takes long-term planning, expert guidance, and even a little bit of luck. And if you're part of the post-war baby boom generation, it will take a special effort to set yourself apart from what will soon be a very crowded field of retiring entrepreneurs.
It's All in the Planning
Among the most common exit strategies for SMB channel partners is a sale to a competitor, an employee or partner buyout, a transfer to a family member, or a sale to a large company. In a worst-case scenario, some owners find they must resort to a wind-down in which they simply sell off their assets.
The difference between a win and a wind-down, experts say, is advance planning.
According to Singu Srinivas, a partner at Chicago-based Waterstone Management Group LLC, a boutique management and consulting firm, "Just as a small business plans for its next quarterly budget, there needs to be a long-term plan for the sale of the business. After all," he says, "you've put blood, sweat, and hard investment dollars into your business. You need an exit plan to ensure you get a return on that investment."
Despite the importance of a plan, Srinivas notes, "Ninety-five percent of businesses agree that an exit plan is important. But 75 percent to 90 percent don't have one."
Your plan may be more complicated if you have one or more business partners-especially if they are on a different retirement schedule than you. In those cases, Srinivas suggests, "If your partner has the wherewithal to buy you out, that's great. But often, they won't have the cash, so a multiyear earn-out may be in order."
The Risk of Getting Less
Without a plan, says Larry Schulze, principal consultant for The Taylor Business Group, an IT solution provider-focused business consultancy in Kansas City, Mo., "The risk is that you will have to sell for less than you want. Also, your employees, clients, and family members may suffer. Anytime you have an auction on the courthouse steps, you run the risk of not getting the full value for your business.
"You can't be there forever," Schulze adds. "So you need to prepare for whatever the end may be. The more prepared you are, the more you'll get out of your business."
Where to Begin
What does it take to prepare? "The first step is to get a realistic valuation of your business," says Jerry Mills, CEO and managing partner of Mesa, Ariz.-based B2B CFO. That may involve hiring an appraiser, he says. Or, it may simply require an objective and honest self-evaluation. Either way, Mills warns, be prepared to face a hard reality. "Business owners are usually very disappointed by their valuations. They find that after taxes, debts, and employees, there's not enough to retire on."
Therefore, the second step, according to Mills, "is to ask what value you need-and then begin the process of getting there. For example," he says, "you may have a value of $5 million, but you need $9 million. There are things you can do to increase from $5 million to $9 million, and you have to roll up your sleeves and get that done."
Mills, who also authored The Exit Strategy Handbook, likens the process to selling your house. "You can sell it quickly at a low price. But if you want to get full value, you need to take the time to paint and fix up the kitchen."
Among the strategies that can make a channel partner's business more attractive, Srinivas says, are expanding your customer base, locking in customer contracts, and increasing managed services and subscription revenues. Srinivas cites mindSHIFT Technologies Inc. as an example of a company that had the right business model to attract a major buyer. In 2012, this Pennsylvania-based MSP was acquired by Best Buy.
The Coming Tsunami
The market for business owners is about to change dramatically, according to Mills. In recent years, he says, about 8,000 privately held businesses were sold in the United States annually. But with the baby boom generation rapidly moving into retirement age, that number could increase to as many as 378,000 annually.
"This has never happened before in the history of mankind," Mills says. "The question is, who will be the buyers for all these businesses? If these boomers get desperate, they will be willing to lower their prices, which will dramatically affect the market."
When to start? Yesterday
Srinivas suggests that the best time to plan your exit is the day you start your business. Failing that, he says, "Make a plan part of next year's overall planning cycle in October or November. Then, update it annually-even if your exit is five to 10 years away."
As you develop your plan, Mills recommends, "Surround yourself with a team of professionals who can help you." That team may consist of a team leader, a mergers and acquisitions specialist, attorney, tax specialists, auditors, wealth managers, and key employees.
Perhaps the most difficult step for any entrepreneur is the one that leads to gradually divorcing yourself from the business. But Schulze advises that your greatest legacy may be a business that no longer requires your presence. "If it's all about you-you're the rainmaker, you handle all the financials, marketing, everything-what value is there? You need to find a way to work yourself out of the business."