Planning Your Exit Strategy

Paul BRANDING, BUSINESS MANAGEMENT Leave a Comment

 
I started pulling wire the Monday after I graduated high school in 1987. I worked in the alarm industry where I learned all the wire fishing skills that I needed (or thought I needed). A couple of years later, I started installing phone, tv, and security systems on my own. That grew into whole-house-audio and flat-screens. I didn't take a vacation for 17 years.

For the first 17 years, I worked six, sometimes seven days per week. If I was conscious, I was working. Once my oldest son was about 5 years old, I started to relax a little. I knocked the six days down to five, and I began planning vacations and spending more time with my family.

The next time I looked up, I was nearly 50 years old. At that point, I started thinking about my exit strategy. What was it, when would I do it? I always said to myself "when it's not fun anymore. I'm out". The fact of the matter is, it wasn't fun, and it wasn't funny.

At the time, I had four technicians working for me. I was on the fast track to a heart attack. I needed out, so I decided to implement my exit strategy. The exit strategy that I hadn't given more than two minutes thought in 30 years.

I began by telling my technicians to start looking for new places of employment. I didn't fire anyone. I let them know that I was no longer going to pursue new business. Within a few months, all of the technicians had found places to land.

Now, I was a one-person shop with a four-person workload. I began referring new customers with no history to one of my web clients. The customers that I had a close relationship with, I handled them throughout the transition. Once I knew I could pay the bills with Paul Ryan Design, I began to push my existing clients over to the other integration company as well. Within a couple of years, something magical happened. The phone stopped ringing at 9 pm.
 
 

Planning Your Exit. Start Today.

What's your exit strategy? If you're a security company with monitoring accounts, it's a bit easier to put a value on your business. But what if you're a small AV business? The company may not have any real value other than the current stock your holding and maybe the value of your client email list.

Take it from me, one day you're 20 years old, and the next day, hot women are calling you "Sir." It's sad on a lot of different levels. Nobody wants a 70-year-old man hanging a 75" television in their home. Again, sad.
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What's The Value Of Your Business?

Before we start talking about ways to exit the business, let's talk value. What do you think the value of your business is right now? There are a few different ways to determine what your business is really worth. Studies show that the average price paid for a contracting company is approximately 30% of sales.

1. The Cash Flow Method.

A simple method is to multiply the cash flow by 3 to 5 times, depending on the business mix and size of the business.
The real value is the present value of the additional net cash that it will produce in the future. The most important asset for the average AV business is the business that comes in each day.

2. Incoming Call Method

Another way you can do a valuation of your business is to categorize incoming phone calls. (Installations, service calls, add-ons, new-construction, etc.) then estimate your closing rate for each one.

1. Make your best guess at the "repeat call factor" documenting every "repeat" phone call from a customer.

2. Determine the sale closing rate.

3. Determine the average income per service invoice, add-on or replacement sale and new construction sale.

Once you have those figures, you do a little math. Let's say your numbers came up to be $85,000.

$85,000 x 75%= $63,750. (A potential buyer will expect to lose about 25% of your customer base upon purchase.

Now, if you use a figure of 5% net income on the combination of business, the purchaser will expect monthly cash flow of $63,750 x .05 = $3187.

Now finish it up with a 3-5 year figure.

$3187 x 12=$38244. x 3 (years) = $114,732.

$3187 x 12 =$38244. x 5 (years)= $191,220.

In the end, your business MAY have a value of $114,732 to $191,220. But now you have to find someone to write that check. Depending on your location and competition, that may be difficult.
 

Your Exiting Options

Now that you know the approximate value of your business. Let 's talk about a few different ways to exit.

Shut It Down.

Stop answering the phone, stop doing service calls. Just stop. While shutting down is always an option, it's certainly not the most profitable. In most cases, you'd be better off selling it if possible.

Sell It.

The key here is to find suitable buyers who understand what you do and value what you're selling. But be warned, this isn't a fast process. Statistics show it takes on average 6 months to sell any business, common sense might tell you to extend the timeframe out for a small AV business.

Most business brokers recommend you start planning for the sale at least 3-5 years in advance. This may sound overly cautious, but in many cases even 5 years is not long enough. As a business owner it is very easy to become overly attached to your business and lose sight of what your business really looks like to an outsider. What makes your company valuable to you may not have any impact on a potential buyer.

Friendly Buy-Out

My father did this exact thing when he retired and sold his security business. He sold to a business acquaintance. They came to a gentleman's agreement that my dad would receive $X per month for X amount of years. In the end, it worked out for both parties. My father had a base of recurring monthly revenue for years, and the acquaintance was able to triple the size of his business overnight.

Would I recommend selling your business on a gentleman's agreement today? Not a chance in hell, but it worked for the old man. Be sure to hire an experienced lawyer, so you protect yourself before, during and after the sale through a transfer of business ownership agreement. And, as with all other options, start planning early.

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