Time to exit?
It’s not a matter of IF you exit, but WHEN.
I know this word “exit” evokes many different emotions in you, the entrepreneur, who has built a business over a significant period of your life. When you stop to think about your life in business, memories flood in ranging from the good and the bad: the staff who have become like family; the dark days of business when you didn’t think you were going to make it; the huge transformational wins that gave you the high of your life; the business partner you had to separate with painfully; the excitement of expansion or paying a debt off and the fear of acquiring it and giving a personal guarantee; the years where you made big money and lost big money. All of these comprise your story and fabric that make up a big part of your life. No one that isn’t an entrepreneur could understand or appreciate your connection to business and how it truly defines a piece of your soul.
So, when the word “exit” is used in conjunction with you, the first feeling conjured is likely “guilt”. It’s a bit like thinking about leaving your family. I know that’s extreme, but it’s true. Everyone you went to war with, laughed with, celebrated with, broke bread with and even cried with are going to be faced with the reality of you, the owner, departing. And what will life be like for them? How will they thrive? The second emotion you likely feel is “confusion,” like looking into a grey smoky room. How do you get from here to there? What are all the steps? How do you keep this all confidential? Who can you trust to guide you through the process? What is your business actually worth? Should you sell to your management team or a competitor? And if the latter, how can you conceivably give your competitor vital information about you, your staff, clients and financials? Most of these questions actually lead the owner to the conclusion, “I’ll worry about all of this when I’m ready to sell.” I’m here to tell you this notion is a huge mistake.
Exiting your business is one of the hardest decisions you’ll make as an entrepreneur. It also has to be the most strategic. There’s a multitude of considerations and the two main ingredients you need are counsel and time.
Counsel - The challenge you face, like most business owners, is that you have spent most of your time running your business and don’t have a big outside network to draw on. You’ll ask around, but is the counsel you are recommend the best person(s) to guide you on this exit journey? Trust me, you have never needed good advice more than in the process of selling your business. I can’t overstate the importance of this. I’ve met most of the accounting firms and M&A professionals in the Maritimes and like everything, some are better than others and some have more insights into your industry than others. Finding the professional counsel that is right for you is the critical first step in your process. But the other counsel you need is from other entrepreneurs. Sometimes this counsel is better than the paid version (more on this below). I’m a big fan of both when considering buying or selling. Attending a business transitions conference is also a huge benefit and exposes you to professional services and other entrepreneurs.
“Exiting your business is one of the hardest decisions you’ll make as an entrepreneur. It also has to be the most strategic.”
Time - The use of time is the biggest mistake I see owners make in planning for an exit. Most wrongly think that it’s time to start the process when you are 100% convinced “it’s your time to exit”. This is a massive mistake and where most people leave huge money on the table. The process of exiting is complex and your “ducks definitely need to be in a row” to capitalize on it fully. What are these “ducks”? Here are a few to consider that require “time”:
Transfer your personal equity - Most owners are integral to the operations of a business. They know the clients, the management, key processes, suppliers, lenders, the market and everything in between, better than anyone in the business. If you are selling to an outside party and the above describes you, then a key consideration for the buyer is: what are they actually buying? If you, the owner is instrumental in the business and it revolves around you, then you are going severely diminish the interest in a buyer and most definitely impair your exit value. With the gift of time, you can implement a plan to transfer your knowledge, relationships, status and operations to a team who will continue to add value after you are gone. This is why time is so critical, to ensure the effective transfer of your personal equity to others to ensure that when a buyer considers your business, that the business is much bigger than you. It’s a bit like the age-old question you get from your accountants and bankers “what happens if you get hit by a bus?” With the right strategy and time, your answer should be: The company will continue to grow!
Have a great balance sheet and years of profitability - A buyer almost always values your business on a multiple of your average EBIDTA minus debt. Every industry trades on a different multiple but the averages are usually based on 2-3 years earnings including your most recent year. They want to see consistent earnings without big ups and downs to de-risk their purchase. If you have had turbulence, as most businesses do, you need a good 2-3 solid income generating years to grow your average as high as possible to apply the multiple to your advantage. If you decide tomorrow to sell your business, you may have a lot of unwanted debt, or recent unexciting years financially that will play squarely against your exit number. But with time on your side, you can create an amazing runway and incentivize your teams to make these the most profitable years possible to ensure a great exit. On the debt front (which gets reduced from your price), if you are on the front end of a debt load, you can take a few years to reduce the debt and increase your exit value as well.
“What happens if you get hit by a bus? With the right strategy and time, your answer should be: The company will continue to grow!”
Get in the right frame of mind - The other thing that time gives you is a good frame of mind. When you compress the time to exit, emotions run high, you don’t know what you don’t know, and mistakes get made. If you commit to a timeline to exit in a couple years you have time to set up your house for the sale, get in the right frame of mind, get the right counsel early, have loads of good advice, and your counsel then can start to seed it in their minds you are exiting. That helps as they network with the right potential buyers or listen for other exits in your industry and learn from them.
Build a network - The Maritimes are a fascinating place to do business. Yes, it’s small relative to other places in Canada but because it’s smaller there is a strong sense of community here. Entrepreneurs (even the most successful ones) are willing to share their knowledge with others who are brave and vulnerable enough to seek it. In your last stage of business, time allows you to build a network of people you respect and trust to help navigate you through the landmines that exits inevitably possess. On many occasions, I have called on the region’s very top entrepreneurs like John Risley or Mickey and Colin MacDonald, thinking they wouldn’t have the time to meet and EVERY TIME I made the call, they made time for me and added massive value. Investing in relationships with those you trust, and respect also increases your chances of an amazing exit.
“I’ll worry about all of this when I’m ready to sell,” and I’m here to tell you this notion is a huge mistake.
Unexpected events - If you learned anything from business, it’s entirely unpredictable and has a mind of its own many years. Life is the same. The other thing that early exit planning gives you is a “disaster plan” for what life may throw at you. I can’t tell you how many times I have seen an entrepreneur suggest they will exit in 3-5 years and “worry about the process later” and get very sick and have to plan a forced exit from a hospital bed, or worse, give these challenges to their estate to handle. Early exit readiness is the right thing for you, the company and your family. Leaving it to the last minute is reckless and tempts fate.
Tax planning - The last thing I’ll talk about is tax planning. Here’s a simple and powerful notion: Are you aware of the tax implications upon your exit? Did you know that you are entitled to about $850,000 in lifetime capital gains exemptions? But if you own the shares in your business personally, then you can’t use your spouse’s exemption, yours kid’s or other family members who likely won’t ever use it. That’s where having a family trust is vital. If you plan to sell your business for over $1,000,000 someday and own your shares directly, then you don’t have a good tax plan and you will give the government hundreds of thousands of dollars (or even millions) depending on the size of your exit. PS You need to have a tax structure in place for at least 2 years in order to use the tax advantages. Another key benefit of “time”.
You have spent many years building your business through all its up and downs and the most important plank to be laid last is your exit strategy. Don’t go into it blindly. Don’t go into it hastily. You know it’s only a matter of time that you must exit, so if that time is within your current horizon of 2-3 years, then be smart and start your planning now. Time can either be your best friend or worst enemy, depending on how you treat it.