What’s Your Business Exit Strategy?

One of the last things on your mind when starting a business is preparing for its sale, yet some of the most common business documents we’re asked to prepare is for the sale of a business in whole or in part (asset purchase, stock purchase, etc.). This is often how business owners ‘retire.’

Business buyers seek opportunities in all sectors and niches; it doesn’t matter whether it’s a local dog grooming business or a multi-city federal contracting firm. As long as a business has some visibility and an existing revenue stream or profit potential, it is likely to attract interest.

But receiving good offers goes beyond simply having a business that someone else might want. If you have ever watched the show “Shark Tank,” it’s typically those entrepreneurs who can promptly spout out financials and sales data – along with having a good idea – that get offers from the featured celebrity investors. If you lack pieces of critical information, a potential buyer – like the Shark Tank investors – will be unlikely to invest. And this isn’t information you can realistically compile overnight. An experienced business attorney can help get you on the road to thinking long term from the beginning.

First, having a budget is a must. While any budget is a good start, bear in mind that many business budgeting templates on the net are outdated or unrealistic when it comes to estimating fees for accountants and attorneys (you might not budget properly for attorney or accounting fees in the beginning, but a business will get to the point where these services are absolutely necessary and you need to plan for that).

Second, it’s crucial in the start-up stage you use some type of accounting software or system that you regularly update and which you can use to produce quarterly and yearly financial reports. This will be one of the first things a potential buyer will want to analyze (in addition to tax returns). Make sure that you keep business and personal expenses separate! This may sound like basic advice, but a large number of business owners procrastinate on recordkeeping or proper financials or worse, don’t bother. Then, when a potential offer comes in, they lack comprehensive data for the buyer to review. Of course, keeping proper financials has some other benefits if the IRS were to challenge a business tax return.

Another critical item is strategic planning with all the necessary parties. While true of any business, operating agreements and other documents take on greater significance in multi-owner businesses, and investors/buyers will want to see these. You and any business partner (i.e., shareholder, member, etc.) must therefore agree on long-term exit strategies. For instance, you may only want to be involved in the business for 10 years when your partner may be thinking fewer than 10 years. What if an offer comes in and the majority of partners think it’s a good idea, but other partners refuse to sell (or vice versa)? If everyone is not on the same page, legal conflicts are likely, and remember that minority partners can have what are known as ‘dissenting rights’ to challenge a sale that is proposed or that wasn’t accepted by the majority. As always, having the proper documents in place in addition to financials and accountability measures ensures that your business is well positioned to take advantage of a potential offer.

If you’ve maintained proper financials, a continuously revised budget, and have proper business agreements in place, presenting material to potential buyers or investors will be straightforward and you’ll be able to ‘reel in’ the good catch rather than lamenting the offer ‘that got away.’

If you need legal advice, schedule a meeting with Tiwari + Bell PLLC through our website or by calling (210) 417-4167