Ask SCORE

Have you developed a Business exit strategy?

QUESTION: I am thinking about selling my small business. Can you offer any tips on how to start the process?

ANSWER: Timing in life is everything, and we can’t always choose the right time to make important investment decisions. Crafting an exit strategy is something every business owner should start thinking about five to ten years prior to the sale.

There are several options to consider. You can slowly downsize, liquidate inventory and withdraw as much cash as possible over a period of several years. This method usually entails letting good employees go, and that can be a tough decision.

You can sell to a friendly competitor whose methods of operation and clientele are similar to yours. If a competitor, will they retain your employees? You can also begin conversations with trusted employees who have expressed an interest and begin to turn over to them the day-to-day operations in a measured way. This will allow you to assess if they have what it takes to manage the business.

In both instances, the potential buyers are familiar with the operation and have a good sense of its worth and growth potential.

A typical buyout usually entails a third-party appraisal of the business assets, customer base and good will. Often, the seller requires a cash down payment and takes a note for the balance, payable over time, with interest. All-cash deals are rare and usually result in a generous discount to the buyer.

If yours is a service business with few hard assets, the buyer will need to do some research to locate a lender who is familiar with the type of operation and how to value its customer base, which is primarily based on repeat business and attrition.

If yours is a family business, there are many issues to sort out well in advance. Are your children capable of taking over the reins? If more than one, which sibling will be CEO and make financial decisions? What will be their percentage of ownership and the responsibilities of each? And what about the child who is not working for the company? Is he or she entitled to some ownership, or will you give them other assets?

The sooner you begin the process, the better will be the end result. In addition to your attorney and tax adviser, the volunteer business counselors at SCORE can offer guidance and resources.

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Gray Poehler is a volunteer with SCORE Naples. Business counseling on this and other business matters is available, without charge, from the Naples Chapter of SCORE. Call 239-430-0081 or visit https://naples.score.org/mentors . To access information for local SCORE workshops go https://www.score.org/naples/local-workshops