A weekly look at Wyoming business questions from the Wyoming Small Business Development Center (WSBDC), part of WyomingEntrepreneur.Biz, a collection of business assistance programs at the University of Wyoming.
By Leonard Holler, CPA, CVA
"When should I start planning to sell off my business?" James, Lusk.
Are you PROACTIVE or REACTIVE when it comes to exiting your business?
You might want to ask yourself this question before it's too late. There are two types of people in the world today: Those that think proactively and those that just react and decide their course of action based on the situation at the time. Proactive people look toward something they want to accomplish ahead of time and plan accordingly.
One of the most important decisions an entrepreneur will make, as a proactive business owner, is looking toward your exit strategy or succession plan. You need to think about this in the beginning of your business because how you plan on exiting your business will have an impact on how you set it up and run it.
Do you want to pass the business on to your children or do you plan on selling it to a third party? Businesses that demand a higher price when selling are usually not directly tied to an owner or key employee. They don't run themselves but, in most cases, they have processes and procedures in place that allow them to operate without the owner's personal attention to every detail.
If your plan is to pass the business on to another generation within the family, you will need to make sure that this family member or group of family members understands how the business operates by getting them involved in the business early. This will give you an opportunity to develop their character and business management skills while learning the operations of the business.
One thing is certain: Someday, you will exit your business. Operating a successful business that provides you a living and a sense of security is not a guarantee that you will maximize its value when it is time for you to go. Many business owners are skillful, hardworking, knowledgeable and successful, but could not generate the value that their business deserved because they did not properly plan for their exit. An exit plan will help you maximize the value for your company. Since every business is different the plans will vary somewhat, yet most businesses exit plans will have certain common elements.
Most exit plans with include these elements:
-- The transition of the business will take one of the following forms: Sale to third party, sale to another owner, transfer to heirs or family members (during the owner's life or at their death) or liquidation at closing. The majority of businesses are sold or liquidated for one reason or another. It is more difficult to pass a business on to family members successfully so that option requires even more thought and planning. Selling the business to a third party usually offers the owner an opportunity to maximize the value received from the business. Which option will you take?
-- Determine the current value of your business and plan ahead to increase its value. Make sure you get your business off to a good start by adequately capitalizing your business with equity and not debt. Watch for opportunities to grow your business and pay attention to your market, customers, vendors and employees. These relationships are critical to the development of a successful business. Also, pay attention to the things that drive value in your business. Measure your performance against those items. Then plan your business to get the most out of it when it is time to sell.
-- Start educating yourself about how to maximize your cash flow and minimize your company's risk. Value is a product of cash flow and risk. Understanding the complexities of cash management will pay off in the end. Business value is all about cash flow and risk. It is what drives the selling price of the business. Cash flow is a measure of your ability to effectively manage your business. With an eye on efficiency and shorter cash cycle, your business will be healthier. Minimize risk by establishing processes and policies that eliminate or reduce risk. Developing these practices will make your business more attractive to potential buyers. Learn about how to improve your company's cash flow and profitability with tools available at www.WyomingEntrepreneur.biz.
A blog version of this article and an opportunity to post comments is available at http://www.wyomingentrepreneur.typepad.com/blog/.
The WSBDC is a partnership of the U.S. Small Business Administration, the Wyoming Business Council and the University of Wyoming. To ask a question, call 1-800-348-5194, e-mail wsbdc@uwyo.edu or write 1000 E. University Ave., Dept. 3922, Laramie, WY, 82071-3922.
