Where to Start with Exit Planning
By Gary Pittsford, CFP®
If you are going to sell the company within three years, then you should start immediately on raising your gross margin, if at all possible, and holding down expenses, including payroll and rent.
In 2022, Angela and Scott Westhoff (left) passed on the keys of ownership of Rose Hardware in Memphis, Mo., to Nikki and Eric Long.
After spending 30, 40 or 50 years running your family-held business, are you ready to start a new chapter? If you are feeling burned out or it’s getting harder to go to work every day, then the answer is probably yes. That means it’s time for you to develop a plan to move the business to a new owner, which might be a family member, one or two key employees or someone else in your industry.
Most business owners have grown their companies over the last several decades and they are now financially strong enough to step away from the company and find something different to do.
Let’s discuss some of the common questions that hundreds of business owners have asked me over the last 50 years.
1. Where do I start?
When it becomes time to put a value on your business and sell it to a new owner, the areas that you need to concentrate on are (1) your profit and loss statements, and (2) your balance sheets for the last three to five years.
The buyer needs to see an accurate balance sheet containing the correct value for inventory, accounts receivable, equipment and other assets. Work on your balance sheet and all of the assets listed to make sure each item is as close to accurate as possible.
It’s even more important to spend time working on your profit and loss statement. A buyer is going to look at your gross income and the cost of goods sold, then concentrate on your gross margin. That gross margin, along with any add-backs from the owner, provide the cash flow that is needed to not only justify a higher market value for the company, but also the cash that is needed to pay off any bank loan.
At Castle Valuation, we currently conduct approximately 450 valuations per year. As we review all of the tax returns and financial statements for these companies, there are two important items that always stand out. Is this business owners’ gross margin higher or lower than national averages for their industry? Secondly, is the total payroll higher or lower than national averages? Sometimes there are other expenses that jump out when we prepare a valuation report, but those are two primary items that business owners struggle with.
If you are going to sell the company within three years, then you should start immediately on raising your gross margin, if at all possible, and holding down expenses, including payroll and rent. You need to be able to show excellent income and profit for your business when it is time to sell.
If the buyer is going to be your children or someone else currently working in the company, then they need the highest cash flow and profit in order to justify a bank loan to buy the company. Also, if you are selling to someone outside the family, then that buyer is basing their price to buy the company on two items: How good is the inventory and other assets being sold, and is this company profitable and making income equal to or better than national averages?
