Deciding to sell a private business is one of the most significant choices a business owner will ever face. This is particularly true for those in the lower middle market, where businesses typically range in value from $5 million to $100 million. The stakes are high, and the process can often be complex. However, a well-crafted exit plan can help maximize the business’s value, mitigate risks, and ensure a smooth transition to the owner’s next chapter—be it retirement, a new venture, or simply reaping the benefits of their hard work.
Understanding Exit Planning
Exit planning should begin well in advance of a sale. This process has gained considerable importance in recent years, with the Exit Planning Institute reporting that 75% of business owners hope to exit their businesses within the next decade. Below, we outline a typical exit planning process tailored for lower middle market private businesses.
Assess Your Goals and Readiness
At the heart of the exit planning process lies a framework built on three essential “legs” of a stool:
- Personal Leg: Reflect on who you are outside of your business. What are your life goals?
- Financial Leg: Understand your personal wealth objectives and how to achieve them, keeping a realistic view of the value of your business.
- Business Leg: Ensure that both you and your management team are aware of the exit strategy and that a succession plan is in place to sustain the company’s success following your departure.
When evaluating your readiness to sell, consider the following:
- Why are you selling? Common motivations include retirement, health issues, partnership conflicts, or a desire to explore new opportunities.
- What do you need from the sale? Determine your financial “walk-away” number, taking into account retirement income, lifestyle needs, and tax obligations.
- Are you emotionally prepared? Many owners find it challenging to let go, especially if the business has long been a part of their identity.
Conducting a readiness assessment often involves collaboration with financial planners, estate advisors, and personal coaches to align aspirations with the realities of selling your business.
Conduct a Business Valuation
Gaining a comprehensive understanding of the market value of your business is vital. Engaging a professional valuation expert can help to assess key areas, including but not limited to:
- Revenue trends
- Profit margins
- Quality of earnings
- Industry position and growth potential
- Regulatory tailwinds and headwinds
- Intellectual property or proprietary processes
- Customer base and contracts
A thorough valuation not only sets a realistic price range but also pinpoints improvement areas that can enhance the enterprise value prior to sale. With careful preparation, business owners can elevate their key performance indicators (KPIs) to best-in-class levels within their industry, which can help them achieve a higher sale multiple.
Optimize the Business for Sale
To attract potential buyers and maximize value, it is imperative to focus on optimizing key aspects of your business.
- Financial Performance: Clean up financial statements, trim discretionary
expenses, and ensure compliance with generally accepted accounting principles (GAAP). - Operational Efficiency: Streamline processes, reduce dependency on owner involvement, and make sure the business can function independently.
- Growth Potential: Formulate a strategic growth plan that highlights future
opportunities for prospective buyers. - Legal Readiness: Address any outstanding legal issues, establish or maintain regulatory compliance, and update contracts with customers, vendors, and employees.
A business characterized by stable cash flows, minimal risk, and strong growth potential generally commands a higher price from buyers.
Assemble Your Advisory Team
The process of selling a business necessitates a strong team of professionals, including:
- M&A Advisor or Investment Banker: Assists in finding buyers, marketing the business, and negotiating terms.
- M&A Attorney: Ensures compliance with legal requirements and safeguards your interests.
- Tax Advisor: Works to minimize tax liabilities and structure the deal effectively.
- Financial Advisor: Helps manage post-sale wealth and plan for the future.
The right advisory team serves as a crucial guide throughout each phase of the sale process, significantly contributing to achieving a favorable outcome.
Conclusion
Selling a lower middle market private business is a journey that requires thoughtful planning, patience, and expert assistance. By following a structured exit planning process, business owners can help make certain they exit on their terms, maximize value, and transition confidently into their next phase of life.
If you are contemplating the sale of your business, it’s wise to start planning early—ideally one to three years ahead—to allow sufficient time for optimizing your business and preparing for a successful exit. Surround yourself with a team of professionals who understand your goals and can provide strategic guidance throughout the sale process.
Our team at Crewe can assist business owners in navigating the multiple options that are available to help achieve their goals for an exit. Starting the exit planning process well in advance of going to market can have a major impact on the overall success of selling a business. Crewe can help business owners with professional services that include:
- Pre-sale liquidity planning and tax strategies
- The exit planning process
- Sell-side and buy-side M&A advisory
- Equity and debt capital needs
- Wealth management
Ready to embark on your exit planning journey? Contact Crewe today to discuss your goals and next steps. www.crewe.com
