When Business Stage Left Is Calling, What’s Your Exit Strategy?
by Matthew B. Dopkin, Esq.
© 2011 Dopkin Law Firm.
“I started a business with an old high school friend twenty-five years ago. The first few years were challenging, but with some hard work and a little luck, we built an extremely successful business over the years. My youngest son will graduate from college next year, and I’m planning to retire a year or two after graduation.”
I remember thinking how great it is for this man and his family to be in that situation, and how he seemed to have worked his plan to perfection. Then, I asked a simple question, and the conversation changed drastically. “That’s great, what’s your exit strategy?” “What’s an exit strategy?” I was not expecting that reply. I explained that an exit strategy is a plan for transitioning from the business into retirement that generally involves selling the business.
Many small business owners have spent countless hours starting and building their business. Despite the common thread of making a significant commitment and investment to build a successful business, relatively few business owners have given much thought about an exit strategy. What makes matters worse is that many business owners actually devalue their own business while in the process of growing it. This may seem counter-intuitive, but it happens time after time. Why, because there are four significant mistakes that commonly trap small business owners, even the highly successful ones. Unfortunately, it is common to encounter multiple issues because of limited time and resources.
The four common traps are:
- The Job Trap
- The Customer Trap
- The Systems Trap
- The Timing Trap
1. The Job Trap
Do you own a business or a profitable job? If you are involved in all the major aspects of your business to the extent that nothing can be finished without you, you probably have a job. The obvious challenge with this trap is maintaining the value of the entity when an illness or other event prevents the owner from doing everything. Most prospects do not buy jobs, let alone pay a premium for them. This is a common trap but one that can often be fixed without a significant investment of time or money. The important aspect of correcting this issue is realizing it exists in time to take corrective action.
2. The Customer Trap
A common issue facing many small businesses is having one or two large customers that account for a significant percentage of sales. Before long, the business may be a hostage to a customer making up seventy-five percent of the total sales. A significant investment of time or money is generally not required to correct this situation. Again, it is important to realize this trap is looming in time to take corrective action.
3. The Systems Trap
How did the systems of the business change as it grew? Was an investment made in an infrastructure for the business, or were things corrected by patchwork? Is the technology adequate for the volume of business? How have the internal controls changed as the business expanded? Is the accounting system correctly recording all revenue and expenses? Is there a current employee handbook? Is the business in good standing in all jurisdictions where it conducts business?
As a business expands, the system requirements should be addressed. It is often difficult, if not impossible, to overhaul systems when attempting to sell the business.
4. The Timing Trap
Business owners fall into this trap when forced into a quick sale without adequately planning. The best time to sell a business is when there is an upswing in sales and revenue, your industry is doing well, when there are many buyers, and when financing is readily available.
It is important to be aware of the internal and external factors and their effect on the timing of your potential sale. Periodic reviews are an investment to maximize the value of the business when it is sold.
Keep these common traps in mind as you continue to build your business. With some planning and consideration, you should be able to make a graceful and profitable exit from your business.
Dopkin Law Firm works with its clients to advise them on the intricacies of avoiding the common traps described above and to guide them to successful and prosperous enterprises. To discuss these or other issues with attorney and CPA Matt Dopkin, contact us at 856-685-4415 or 215-519-4269, or via email.
This Alert is published by Dopkin Law Firm. It is provided solely as legal information, not legal advice. Legal advice depends, to a large extent, upon the particular facts of a matter. For legal advice, contact your legal advisor.