When the COVID-19 pandemic hit, business owners around the globe paused their exit plans. Much like the economic downturn of 2008, exit planning during a pandemic got complicated. Both times, growth slowed and many who had counted on a near-term exit were faced with lack of buyers and a depressed valuation of their business.
Exiting post-pandemic requires preparation
While the process for a successful transition coming out of a pandemic still encompasses the standard steps, there are some nuances to keep in mind.
- Develop your goals and objectives
Valuations matter: Get an appraisal of your business
- WHEN: Determine when you would like to exit. Chances are any buyer will want you to stay on for some time to ensure a smooth transition. Build that time into your plan.
- HOW: Your business is likely your largest asset and the main cash flow generator of your current lifestyle. Calculate your lifestyle needs and determine if the exit transaction will support you throughout your remaining years.
- WHO: Determine who will be the buyer. Whether it is a family member, management, a financial or strategic buyer, or an ESOP, the transaction path will need to be planned accordingly.
A valuation is the basis for your sales price and includes a review of historical profitability, indicating a temporary or permanent pandemic effect.
Why is a valuation important?
Strategize the transaction
- An independent valuation analysis will assist in the negotiation process.
- If your company's value has been diminished by the pandemic, you have the opportunity to develop an action plan based on a SWOT (strengths, weaknesses, opportunities, and threats) analysis.
- The sales price is a factor of future cash flow, so the narrative should be about where you are today and what is in place to grow the business in the future. Make sure your business plan is tuned up and considers navigating future unknowns.
- Once the value is determined, you can create a strategy to bridge any gap between your financial goals and your business value.
- If your value is on target, consider accelerating your timeline so buyers can take advantage of current low interest rates.
Gather a team of advisors with the skill sets necessary to help navigate a successful transaction including an accountant, banker, attorney, and potentially others who specialize in the transition type you choose.
The pandemic might not be the only thing that could have thrown a hiccup in your exit. Proposed changes to estate and income tax laws might cause drastic differences in an exit if not planned for. Moreover, plan for the alternative income tax implications of any transaction structure.
"It's not about the sales price, it's about the amount you bank after taxes."
Get ready for the encore
Figure out what you will do after the successful transition of your business. Whether your business has thrived or suffered the past year, you are not alone and planning is still important. Don’t be that owner who one day wakes up and decides it's time to get out. It will be too late to garner the best price and too late to manage the cost and tax ramifications optimally.
If you have any questions about how SVA can assist your business, please contact the author or firstname.lastname@example.org.