Planning a good exit strategy for your small business is just as important and just as crucial as planning a good start up strategy and a good marketing strategy and a good financing strategy for your small business.
5 tips for planning an exit strategy for your small business
1. Know how to determine the value of your small business
One of the most important steps that you need to take when planning an exit strategy for your small business is knowing how to determine the value of your small business. Valuation is vital when determining how much to sell your business for and how and when you should purchase a small business. There are several methods used for determining the valuation of a small business.
A. Rule of Thumb valuation
When Rule of Thumb valuation is used, a multiplier is used to determine how much a business is worth. The multiplier is projected upon the profitability and the cash flow of a business. The majority of the time, the base used for the multiplier is called "Earnings Before Interest and Taxes", also known as EBIT. Earnings consist of profit, rather than gross income. To determine the valuation of the small business, the Earnings Before Interest and Taxes is multiplied by 3, 4, or 5. Using the multiplier of 3 means that there will be a return of 33 percent per year; using the multiplier of 5 predicts a return of 20 percent per year. If a business possesses a small number of tangible assets, the multiplier to use is 3; if the business has a number of valuable assets, the multiplier to use is 5.