Exit Planning: Don’t get caught short by the Four D’s

 They say getting old stinks, but then again the alternative isn’t acceptable. Stopping the aging process — well we know what that means and it’s not an option.  Everyone gets older and that compels we develop an exit plan.  That doesn’t mean you should go out today and buy a cemetery plot.   But it does mean having a written exit plan for you and your business. 

About 50% of businesses are sold below their market value. This is a direct result of the four D’s: divorce, departure, disability or death.   Selling your business because of the four D’s often results in a sales price below market if there is no plan in place.  The other 50% are sold as a result of thoughtful exit planning — thinking ahead. 

Whether you planning to sell in three years or in twenty years setting up an exit strategy is important for any business owner.  There are a few key points to consider.

You will need to know

1)     How much is the business worth today

2)     When (years from now) would you like to sell and stop being an owner in this business?

3)     What is the reasonable expectation of what the business will be worth when I want to exit?

1. And what steps do I need to take to grow it each year by that amount?

4)     How much money do you need from the sale for financial planning or retirement? 

5)     Will the sale proceeds be sufficient to support my retirement? Do I need to downsize?

Then you’ll need to decide which strategy execute….

1)     Liquidating the assets/ business

1. Usually a last resort.  This involves selling the equipment and assets.  Often a result of low-performing or low/no profit businesses including smaller practices with older equipment, flat or declining revenues and no capital improvements.   Often these businesses are simply closed. An example might be a doctor who reduces their work hours, keep the office open simply for something to do (keep themselves busy.) At some point the owner can’t afford rent and is forced to liquidate.  An alternate to this exit plan is to sell much earlier while the business is still “peaking” or merge with a nearby practice to consolidate expenses.

2)     Selling to a family member

1. This can be awkward at times.  A child or relative may expect a better deal or discount in the sale price.  However, keeping it in the family provides a feeling of pride by creating a legacy for the founder.

3)     Selling to employee(s)

1. Selling to an employee and allowing them to buy in over time or simply selling them everything at once is quite common especially among doctors.  The business must be able to support two doctor salaries prior to the sale.  Most independent offices manage this scenario because the average independent practice cannot support 2 full time doctor salaries. (average office revenue $500,000 per year).  This scenario works well in a large practice that already supports multiple full-time employed doctors. A good structure incorporates a plan where new partner “buy into the office” as retiring ones exit. The business self-finances the purchases and pays off the selling partners from the business cash-flow.  In this way the business almost becomes “immortal” and provides a kind of “annuity payout” to the retiring partner.

4)     Selling to someone on the open market.

1. This is also the most common for the average size practice and individually owned offices (even those with 1-2 employed doctors).  The owner is cashed out and is free from any continued liability or stress in managing the practice.  Often (and if the practice profits can afford it) the owner stays on as an employee and works part time.  This provides the seller the ability to see patients (the fun part) and leave the management part behind.  (burn-out) .

5)     Selling to a competitor or a strategic buyer.

1. Businesses grow either organically or through acquisition. Acquisition is always faster despite the debt from the purchase price.  Competitors may consider a purchase to knock out competition.  Strategic buyers look for efficiencies or other alliances common with their own business. A major supplier also can be considered a strategic buyer.  Strategic buyers are rarer, but will often pay a higher value for the business.  Typically a strategic type buyer needs to be targeted and identified well in advance.

Practices can take anywhere from six months to several years to sell depending on the location and revenue size of the office.  Developing an exit plan in writing from day one is critical to any business owner.  The date of selling can always be modified or extended, but the steps to get there remain unchanged.  In many cases owners don’t have their plan written.  Of course it’s easy to procrastinate. But if there even a remote possibility that your transition window is ten years or less– it’s time to get your pen and paper out and make a plan.

SIDEBAR:  Basic steps

1. Find out what your practice is worth today
2. Decide when you would like to complete a transition. How many years from now?
3. Determine how much money you need at that time (get a financial planner)
   1. Retirement savings + Proceeds from sale of practice
   2. Determine how much you need to grow your practice each year till that time
   3. Implement a management plan to grow the profit.  (often requires a coach or consultant)
   4. If employee purchase is desired, then determine how long in advance you should start to look for an employee.  (could be 5 years or more in advance, but that’s another article by itself.)