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Leaving it all behind: A shop owner's exit strategy

Tuesday, August 22, 2017 - 07:00
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Do you remember all the excitement and enthusiasm you had when you first started your repair shop? Maybe it was when you got your business cards. Shiny, new, freshly printed with your official company name on them! Or maybe it was when you had your company sign installed on your building? Or perhaps the freshly printed stack of new company checks? All the activity, the work, the unfulfilled dreams – that was then. But this is now!

Now, after however many years of running your operation, you’re ready to call it quits. Whether you’ve been wildly successful or have just been able to keep the bills paid and the customers happy, you’re still ready to “call it a day.” If you’re at that point, please pay attention, and you’ll learn some basic strategies to help you navigate the waters ahead. In preparation for writing this article, I interviewed quite a few independent shop owners and was dismayed to hear that not many of them had given any thought as to how they might one day “cash out.”

The first and most important aspect of getting out is to determine what the business is worth, or valuation.

Scenario 1: You own the property, the real estate, and building.

This example is much more complicated, and most certainly will require the assistance of either a real estate agent, banker, or perhaps a business broker. The options here are almost limitless! You may decide to sell only the “business entity itself”, i.e. the name, equipment, all contents, and most importantly – the customer database. The beauty of this approach may not be self-evident. When a prospective buyer is reviewing his options, he only has a couple. He can do as you did, and start from scratch. He can buy some land which is properly zoned, get the necessary permits, erect a building, buy many tens of thousands of dollars in equipment, hire the staff, and so on. He would then do the necessary advertising to get the first paying customer in the doors. But why would he do that? After all, your cash register is already ringing! Theoretically, you both could close on the sale of your business on a Friday, and he could start earning profits come Monday morning. When negotiating with a serious buyer, it’s crucial you point this out.

You could sell only the actual business, business name, customer database, and equipment. You could then choose to lease the building and property back to the new owner. This is smart for a number of reasons which a prudent real estate agent or broker can help you to realize. Demographic analysis and market studies will tell you if the values of commercial property are trending up or down. If trending up, it might be wiser to maintain control over the property. If analysis indicates otherwise, it might be best to “cut and run.”

Scenario 2: You do not own the dirt or the building

In many ways, this is a much simpler sale, requiring transfers of tenancy, responsibility of all utilities, etc. Should this be the case, the new owner will most certainly have to qualify and agree to the landlord’s requirements for occupancy. Should the new owner wish to change the name of the business (generally not a good idea unless there is negativity surrounding the existing business name), they’ll have to get concurrence on it, at least from the city or county, as well as the landlord.

So, what is my business worth?

How it works:

1.     Add up the value of all the assets such as cash, stock, plant and equipment, and receivables.

2.     Add up liabilities, such as any bank debts and payments due.

3.     Subtract the liabilities from the assets to get the net asset value.

Similar to bond or real estate valuations, the value of a business can be expressed as the present value of expected future earnings.

There are a lot of ways to value a business. There's no "right" way, though you could probably come up with several wrong ones. Ultimately, the business is worth whatever you think it's worth, based on the criteria you set forth. But you can make your estimation by using several different ways to value the business and then choosing the mix that reflects your final value estimate.

You can start by looking at the value of the business's assets. What does the business own? What equipment? What inventory? After all, a new owner would have to buy all the same stuff if they were starting a teashop from scratch, so the business is worth at least the replacement cost. The balance sheet can give you a good indication of the value of the company's assets. If the company doesn't have a good set of books, a prospect might think twice about buying it.

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