Exit Your Business
For many, COVID-19 has highlighted the worst parts of being an entrepreneur – the uncertainty, the sleepless nights, the running-in-place-while-moving-backward exhaustion. If that sounds familiar, you might be starting to think about your next steps and life beyond the business.
The first important distinction is to confirm you are both willing and able to exit. Willingness is your emotional and mental state; ability is a financial one. If your liabilities outweigh the market value of your business or physical assets, you will be unable to exit (short of bankruptcy) without first increasing your asset base, reducing your liabilities, or some combination thereof.
As always, never hesitate to reach out to a Maine SBDC advisor for one-on-one assistance. We’re here to help you navigate that – so reach out.
Check out our How-to-Exit-Flowchart to see your options based on your timeline. Key considerations to factor in while deciding which option is best for your business include when you want to exit, your current debt burden, your willingness to hold a Note, and your ability to demonstrate support for your asking price. Please reach out to a business advisor who can help you through this process and help you identify best options for your business.
Selling your business may seem like a good option for your business but it takes time and preparation. Selling keeps your business alive, potentially allows you to remain connected and involved in the business, and can provide value for the hard work (goodwill) you have put into it. In order to get the maximum value, you’ll need to make sure your business is “sale ready”. Read our blog here about preparing your business for sale and how to exit your business smoothly.
How much is your business worth?
There are many methods to valuing a company – talking to your financial analyst, accountant, or business broker will help you understand the process more fully. However, they all boil down to two key concepts: first, your business value is determined by an open market, in which a Buyer likely is considering multiple options, and second, in the majority of cases, a business must be able to pay back both the Buyer’s investment and the debt created in the purchase.
In other words, if the annual debt service created by the purchase price exceeds the Net Income of the business, it is not a viable purchase for a new owner. In the vast majority of cases, the business must be able to pay for itself for it to make sense to a Buyer.
What is Goodwill and why does it matter?
Goodwill value has a lot of definitions, but is essentially the value a buyer is willing to pay above and beyond the market value of the physical assets. Most often, this value is directly correlated with the Net Income generated by your business – in other words, the value created by the physical assets, not the value of the physical assets. If your work, business name, phone number, systems in place, etc. do not generate income, then a Buyer won’t be able to see any value to the “Goodwill” they create. Goodwill is determined by the Buyer and is a result of the business’ ability to generate demonstrable returns. Read more.
Finding a Buyer for Your Business
An Internal Transition can be a (relatively) easy option and has the most flexibility for negotiation and structure. Because an internal transition involves a long-time employee or family member, there is a degree of trust and continuity that opens doors. While the business must pay for itself – the Buyer might not be bringing any additional skill set or equity to the table that isn’t already there – flexibility in the pricing structure may result in the Seller getting a better price over a longer period of time in exchange for the opportunity.
If no next-in-line Internal Buyer exists, a Seller can market externally. For confidentiality reasons, you’ll likely need a Business Broker to help you in this process. Brokers will also help determine a reasonable market value, identifying and vetting potential buyers, and negotiating the transition. Due to the complicated process of marketing and transitioning a confidentially-listed business, most external business sales in Maine take 18+ months to negotiate and execute.
Other options – Consider an Asset Sale
Not interested in waiting that long? If confidentiality and price aren’t a concern for you, a simple asset sale takes much of the negotiation and due diligence out of an external sale, without needing to demonstrate intangible values. You can market the business yourself or approach an auctioneer to do it for you.
If you don’t want to take the time to market your Asset Sale as a “package deal”, sometimes it’s easier to sell your best equipment to competitors or customers and get rid of the rest via an auction company. So long as you’re able to pay off your debt, it’s an easy path forward!
If you are considering bankruptcy, you should immediately seek out legal advice from an attorney with bankruptcy experience. Our Advisors can cover the basics with you, but bankruptcy is an incredibly difficult, arduous, and emotionally taxing decision, whether you are using it to restructure, liquidate, or negotiate. It can also be, ironically, incredibly expensive. Understanding how your decision will impact both your business and personal life is critical, and is it not a decision to be made lightly or without the full weight of knowledge a bankruptcy attorney can provide.
When you decide to exit, despite our best wishes, it is rarely as simple as flipping the ‘Open’ sign to ‘Closed’. Making sure you have a good team around you to help guide your process is key. Team members might include an Attorney, a Business Broker, an Accountant, a Financial Advisor or CFO, a key employee, family members, or your SBDC Business Advisor. Letting your team work together to guide your best interests and protect you through this difficult time can help take some of the burden off your shoulders.