Tips for planning an exit strategy for your small business

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.

B. Fair market value of fixed assets and equipment valuation
If your small business is driven by assets, such as a retail store, a manufacturing company, a wholesaling company, or other similar businesses, then the majority of the business' valuation is determined by the value of those assets. Asset valuation is based on the Fair Market Value of Fixed Assets and Equipment, which is essentially the amount of money that it would cost to purchase similar assets and equipment at contemporary prices; added to that amount is the wholesale value of the Inventory. This Asset Valuation is combined with Owner Benefit to determine the absolute valuation of a small, asset-driven business.

C. Industry average valuation
Industry Average valuation makes use of the valuations of similar types of businesses and sizes of businesses that have been sold in the last six to twelve months. An Industry Average valuation will produce a ballpark figure of value that can help provide a starting place for determining the value of the specific business. Other factors that change the value of a business include the length of time in business, the customer base, the quality of assets, the location of the business, and others.

2. Determine your objective
When planning an exit strategy for your small business, decide what your objective is. Determine when you want to leave your business-a certain number of years, a certain value reached, etc. Also, determine how much money you will need before you can afford to exit your business.

3. Designate a particular coordinator
Decide upon a team of advisors or a particular advisor who will be in charge of determining the best way to exit the business, will be in charge of determining the value of the business, and will also be in charge of coordinating the sales effort.

4. Get your business appraised
Find an independent appraiser to determine the value of your business.

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