Still In The Business Planning Stage? It’s Time To Start Plotting Your Exit Strategy

Highway Exit

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When Vanessa Troyer and Chris Farentinos launched in 2000, they didn’t give much thought to how they would exit the online mailbox distribution company.All that changed in 2006.

recognising the huge growth potential in manufacturing high-end mailboxes for builders and retailers, the Los Angeles couple decided to channel all their efforts into a second business, Architectural Mailboxes. This meant selling the highly profitable to free up the necessary funds.

It wasn’t a scenario most entrepreneurs envision when they think about exit strategies.

“No one was sick,” says Troyer, 45. ‘We didn’t want to retire. Investors weren’t saying ‘I’m done.’ There was no reason to sell the business.”

But sell the couple did, garnering more than $1 million for the venture they’d founded eight years earlier with just $25,000.

It was the right move: Today Architectural Mailboxes continues to grow, with products in every Lowe’s store in the nation and more than half of Home Depot’s locations. Amazon carries 140 of the company’s products. And, Troyer says, the business is on track to grow by 38 per cent by the end of 2011.

Hoping to follow in Troyer and Farentinos’ footsteps? Experts say the best way to ensure you leave your company when and how you want–with money in hand–is to start plotting your exit strategy now, even if you’re still developing the business plan. Sadly, study after study shows that a majority of entrepreneurs have no exit strategy whatsoever in place.

If this sounds familiar, don’t fret. You’re about to get a crash course in preparing for two of the most common ways to successfully exit a business : turning the reins over to a relative and selling the company.

Succession Planning vs. Selling to an Outside Party

Planning your exit strategy is about making “a proactive series of decisions” instead of merely reacting to unexpected events like a heart attack or an economic downturn, says Ted Thomas, managing partner of Sun Exit Advisors, a business transition planning firm in Chicago.

“It’s almost like the military: Before you go in, you want to know how you’re going to get out,” Thomas says.

The idea is to put in writing when you see yourself leaving your business, how much income you need to walk away with and how you see yourself transitioning out. Do you envision yourself eventually downshifting to consultant? Growing the business to sell it? Grooming an heir to take your place?

If your hope is to keep the business in the family, experts say the time is now to have the tough conversations with your spouse and children about whom you want to succeed you–and if they’re even interested in the job.

“If you have buyers coming to look at your business, one of the first things they’re going to ask is ‘Have you talked to your family about this?'” says Terry Mackin, managing director at Generational Equity , a Dallas-based firm that helps middle market companies plan their exit strategy. “They don’t want to come into a situation where the family is at odds about whether the business should be passed along.”

“One of the greatest mistakes people make is assuming that a family member will want to or be able to take over the business,” says Jack Garson, business attorney and author of How to Build a Business and Sell It for Millions . “Rather than trying to fit a square peg into a round hole,” he says, sometimes the best way to provide for an heir is to “sell the business to somebody else and give the money to your kid.”

If you do see selling as your exit, you need to focus your energy on creating a business that buyers will want. This means working on your profitability, competitive edge (so you stay profitable), sustainability (so you survive economic downturns), scalability (so the business grows) and corporate culture (so you hang onto good people), Garson advises.

“If you’ve got all this,” he says, “people will be banging down the door to buy the company.”


Finding the Right Advisors

As glamorous as selling your business may sound, entrepreneurs who’ve been there will tell you that it’s an incredibly stressful, time-consuming process fraught with dozens of moving parts and truckloads of paperwork. If you don’t hire the right financial, legal, tax and business advisors to help shepherd the sale through, you’re doing yourself a great disservice.

“The mistakes you could make just getting the tax part wrong could cost you 50 per cent of the proceeds of the sale,” Garson says.

Along with an accountant and attorney well-versed in business sales and acquisitions, as well as a personal wealth manager, you’ll probably want an experienced professional in your corner who can broker the deal–namely, a business broker or an investment banker.

“If you’re selling the business for $500,000, you’re using a business broker. If you’re selling the business for $50 million, you’re using an investment banker,” Garson says, adding that the cutoff point between the two falls in the $5 to 10 million range.

Besides helping you set a realistic asking price and assembling the necessary marketing materials to entice sellers, brokers and investment bankers will discreetly contact potential buyers on your behalf.

“In general, sellers do not want anybody to know that they’re selling the business,” says business broker Sally Anne Hughes, owner of Hughes Klaiber a New York brokerage firm for midsize businesses. “If a client finds out the business is for sale, they might be concerned. Employees might also be concerned. Vendors might be concerned that they won’t get paid.”

To find a reputable broker or investment banker, get recommendations from your business advisors or entrepreneurs who’ve sold their business, Garson says. Be sure to vet any brokers or investment bankers you’re contemplating working with as they predominantly work on commission.

“Ask them the average size and price of the businesses they’ve sold,” suggests Architectural Mailboxes’ Troyer. “If your company is worth $1 million and most of their sales are $7 million, you’re not going to get much attention. You want to be with somebody who’s selling businesses right around the price of yours.”

This post originally appeared at Entrepreneur.