Here are the main elements of your exit plan. Communication is a prerequisite to the following steps. It’s touchy to think about telling employees your plans, isn’t it? But at some point, you may have to or should bring in key people. In the meantime, it’s a good start saying things like:
- I’m getting to retirement age. Wow, time flies.
- That vacation was great. I need to take more.
- My spouse really wants to travel more.
The bigger the secret, the bigger the surprise, the harder it is to gauge your team’s reaction.
You need solid financial systems and thus accurate financial statements. Do an internet search for what to do when preparing for a business sale and the following will (or should be) on every list:
- Put great people in roles that fit their skills. Don’t call a bookkeeper your accountant or controller. Don’t call your data entry person your bookkeeper.
- Write clear procedures with checks and balances. Hold people accountable to these standards.
- Use good accounting software. QuickBooks is great up to a point. When it’s not, invest in more robust software.
- Monitor and forecast cash flow regularly.
- Reconcile all accounts, including inventory—and don’t expense inventory when purchased. If you do, you’re understating income.
- Ensure as you grow that your people get the right education on best practices, laws, trends, etc.
Build a good management team. You need more than just capable people in each role. Know where you need to shore up your team and when. For example, if you’re an operations expert, you probably want to build up other parts of the team first. Think about the future, not just current skills. Can your people grow, take on more leadership responsibilities, and do it all enthusiastically?
Let them do their job (this means delegate). Seek out people with diverse backgrounds and experiences. Encourage collaboration and open communication. Invest in their education and development (perhaps by hiring a coach).
Finally, lead by example. This includes ethics, communication, accountability, and transparency, not to mention supporting your team as they grow.
Grow the business. Don’t just say you can grow it. Do it. Buyers are skeptical by nature. (Look at all the ads for businesses for sale, and you’ll see why.) A lot of owners get to a certain point and then coast—and you can only coast downhill. Buyers look for an opportunity to instantly create value. Be prepared to show them what you did, document it, and show how the buyer can replicate your success.
He Could Have Got (Much) More
The owner/seller was doing fine. He built the business from startup to about $1 million in profit (after his salary and perks). He was happy, didn’t want to work any harder, and life was good.
The buyers came in, changed the compensation plan to reward employees, put in an aggressive marketing program, and were up 66 percent after one year. Whether the seller needed it or not, he left a lot of money on the table by coasting.
Recruit and retain great people should be your mantra, especially given the cost of replacing people. Here are some numbers. The Society of Human Resource Management says it costs six to nine months of a person’s salary to replace them. The center for American Progress says it costs 16 percent of an hourly worker’s annual income and up to 213 percent for exempt employees. And this is just the financial burden. What about institutional knowledge, the effect on morale, or damaged customer relationships? Retaining your people should be your top priority because that’s what every buyer is really buying.
Avoid customer concentration. Your top customer and you may love each other, play golf together, etc., but to a buyer, it’s risky to have too many eggs in one basket. Many small businesses have a customer who accounts for more than 10 percent of their gross income, but when it gets to 20, 40, or 60 percent, it’s scary. Diversify, diversify, diversify your customer base. A bonus is you’ll alleviate pricing pressure if you don’t have a dominant customer.
No dominant supplier. Years ago, a banker friend told me they were lending money to a business and were spooked because the business only had one supplier. The bank didn’t offer the loan until they had done due diligence on the supplier to ensure they were healthy. The lesson is, have multiple options for products or services.
Get your tech together. This goes two ways. First, use whatever technology you can to improve productivity. One new owner eliminated the need to write (most) checks by switching to automatic payments on credit cards, a payroll service, and ACH payments. Second, don’t use technology just for the sake of using it. It may be fun, but it can be a time suck and costly.
This article is an excerpt from our book, Exit With Style, Grace, and More Money © John Martinka with Jessica Martinka 2024
