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By Dirck Holscher
A number of years ago a friend and I were talking about the future of our printing businesses. During the course of the conversation, he asked me, “Have you considered an exit strategy for your business?” Up until that evening, I really hadn’t thought much about it. But his question got my attention, and I began to think more about what an exit strategy might look like.
In order to develop an effective and profitable exit from your business, you need to concentrate on building shareholder value. Though this concept is usually applied to large public companies, it applies equally well to small businesses. But with a small business, the shareholder who benefits from building value is you, the business owner.
Most big public companies talk about building shareholder value for their stockholders. The idea is to make the company more valuable, hence raising the price of the shares. Though most small businesses don’t think about it in these terms, the concept is the same. In order to maximize the sale price of your business, there are a number of ways to increase its value, and ultimately its selling price. While the goal is usually to sell your small business to provide retirement income, very few businesses sell for enough to finance a comfortable retirement by themselves. The business is usually part of a plan that can also involve real estate assets, retirement plans and other investments.
There are several issues to consider in building value in your business:
How much are your assets really worth?
Types of business assets:
Hard assets, e.g. equipment: Your business may have some hard appreciating assets that may be worth substantially more than their depreciated book value.
Intangible assets: It is important to distinguish between the value of business goodwill versus individual goodwill. In many small businesses, the following is often personal, not corporate. In other words, the success of your business may be too dependent on your personal involvement. If your buyer perceives this to be the case, the value of your business (minus your participation) can drop substantially.
It is difficult to build shareholder value in what is essentially a personal service business. This type of business sells for low multiples of earnings in most cases.
What is your “unique selling proposition”? What are the unique value-added services the company provides that will draw the customer to your business instead of others? Establishing a brand identity can be difficult for a small business. But a unique approach to the market can add substantial value to your business.
Some Ways to Build Value
Reinvest in your business: Retain earnings in the business. Reduce your leverage. Pay cash for equipment instead of leasing. Don’t buy more equipment than you need, and don’t be sold more equipment than you need. Look into buying used or demo units.
Maximize Tax Favored Retirement Vehicles: Business produces significant income, which can be sheltered for retirement by tax-favored vehicles such as 401(k)s, SEP-IRAs and other vehicles. Many small business owners don’t sufficiently fund retirement plans, basing much of their retirement on funds gained from a business sale.
Strengthen other outside investment programs: Many business owners have too many eggs in the small business basket.
Real Estate: Business real estate, especially where you are the principal tenant, is an excellent way to build long-term value. As one owner once told me, “I made a living from the business, but retired on the real estate.” Of course his business happened to be located near the site of a new subway station in a major metropolitan area.
Not all of us can be that lucky, but many owners have financed a comfortable retirement from the sale of their business premises. Sometimes the sale is to the new owner of the printing company; sometimes the building is sold to a new user. The real estate is often held in an entity outside the business.
Is the business replicable? Can the business be expanded using the “cookie cutter” approach through branches, multiple locations or franchising? Can you teach others the business? If is repeatable, this can add value for some buyers.
Remember to work on the business as well as in the business. It is important to work on improving business operations and value, not just doing a day-to-day job. Many small businesses are the equivalent of “buying yourself a job,” with minimal prospect for increased value. Other companies are essentially lifestyle businesses, which serve to support the owner’s lifestyle, but are not run in the most businesslike manner.
Branding: Consider registering and developing a trademark and a unique approach to the market. This can make your business more successful while you own it, and easier to sell when you decide to exit.
Start considering business sale prospects well before you plan to sell your business. You might want to consider a buyout by key employees, or perhaps an Employee Stock Ownership Plan (ESOP). Trade associations can provide ideas and information, such as ratio studies, which can assist in determining valuation benchmarks.
Remember that the time you spend now building business value can produce a big pay-off for you when you decide to sell your company.
Copyright 2017 by Larry Hunt Publications. No part of this report may be copied or reproduced in any form without the express written consent of Larry Hunt Publications. Material presented in this publication is based on the best information available but cannot be guaranteed for completeness or accuracy. To subscribe, contact Larry Hunt Publications, P. O. Box 1269, Berryville, VA 22611 - (540) 336-3360, Fax - (888) 345-3860, email: dirck@ larryhunt.com, website: www.larryhunt.com. Editor: Dirck Holscher .