Why Exit Strategy?
As with most things you should begin with the end in mind. However, a lot of small business owners simply begin and never really consider the end state of their business. Understandably, they are busily running a business! Who has time to think about retirement? In my local area, there is a storage unit business that has units and a warehouse. The owners would like to sell and are both well into their eighth decade. They have a little over 100 units and about a 7000 square foot warehouse. They are asking, in my opinion, approximately three times the market value or their property. I've interviewed them and I can find no justification except “what the next owner could do with their property”, but no current justification for such a high price. So I imagine that their spouses or children will end up disposing of the property in the next 5 to 15 years. They will have to do it quickly since the estate tax will come due, and they will likely have to sell under market to move it. It seems like a shame to me. With just a little planning or guidance the families of the owners could be set up with a nice long-term income and not have to deal with all the legal hurdles that will come with dividing or disposing of the property and the business.
How to create Exit Strategy?
So what reasonable options are available? Of course, you could just simply sell. But then the question is how do you evaluate the property. There are several possible reasonable solutions. If you ask a real estate professional you will likely get a formula to evaluate cash flow plus the cost of construction - depreciation. That's not a bad place to start. A quick way to fairly evaluate the property is a multiple of annual sales. Normally, anywhere from three to seven years annual sales will bring buyers. Provided your property is paid off, this should leave you with a nice lump sum at the end of your career and the price will be easily justifiable. Especially, if you're using software track your sales, contracts, and tenant status. The easier you make your business to operate and take over the closer you can likely get to that 7X annual sales. The next option which I believe to be largely overlooked is to higher a property management company. Laws vary from state to state and country to country, however, in general, any real estate broker (not an agent) is capable of setting up a property management contract. The typical fee is about 20% of the total rent. Normally, the owner remains responsible for repairs only financially. property manager handles all the red collection notification lien sales and scheduled maintenance with contractors you just get the bill so even if that were to cost 30% of your annual sales you still get to retire at 70% of your annual sales. That seems like a pretty good deal to not have to go to work! Again, the easier your company is to take over and run the more of a premium you can demand. If you have a turnkey easily managed company, you may get brokers to bid against each other and do way better than 20% fee. A third option is to sell the business on a land contract. Again this varies from state-to-state and country to country. So make sure you get good legal advice before you enter into a land contract for the sale of your business. Essentially, the owner acts in place of the bank. You can charge interest, collect payments, and foreclose in case of non-performance. You can also pass the land contract on to your estate. If you have ever looked at the amortization rate on a standard mortgage, You'll know that the interest rate is front-loaded by a massive amount. There's no reason that all this profit needs to go to the bank. So even in the later stages of life, a 20 to 30-year land contract can still be very attractive to you, and still leave a lot of value for your heirs. It is also a great way to stop squabbling before it starts. This way you can sell one or more and have them make payments to you until you can no longer collect, and then they can pay their siblings or other errors so that the value of the property is equally distributed at the time that it was sold. For instance, if I were to evaluate my own property at 7 x sales it would be approximately $300,000. The mortgage payment would be approximately $1,700 /month for a 30-year loan. For acting as the bank with no down payment you can easily justify a premium, even to your kids. So if one of my four heirs were to purchase it on a land contract for 30 years and pay only 10 years at the time of my passing, they would owe proximately $235,000 to my estate. They would have the option to refinance at 75% of the current value to buy out the other three siblings. It seems to me that this would be a very clean and efficient way the pass on the value of the business. (and it is actually my plan) It doesn't have to go to a sibling or an heir, it could just be sold in which case the payments would just continue to the estate and then be divided out among heirs. Or refinanced and settled as a lump sum. There are lots of options.
How we help you?
Getting a premium for your business involves making it as attractive as possible to prospective buyers. I believe that starts with solid business processes, and that starts with great software. Which is why I'm using 6Storage for my business. It's easy to use, and when it's time to sell, it'll be easy to train whoever takes over. No matter what you do, please put some thought into how you want to exit. The smoother the plan goes, the better it will be for you, the next owner and your customers.
