If you are a CEO of a small company with investors, you have a fiduciary obligation to your stockholders to present them with all exit options and offers. If you are the sole owner, you still owe yourself and your family that fiduciary responsibility. Therefore, it is very important for all CEOs to know their exit options and their possible impact.
While the exit strategy should not be on every CEOs mind every waking minute, it should be visited at least once a year. You can do that during your yearly planning period. Reevaluate where your company stands along with your exit options and overall assets and liabilities. Identify what you need to do to boost the former and shrink the latter.
Your digital optimization and transformation strategy can help you with both. While making decisions about where to invest, consider their impact on your bottom line and on their impact on your assets and liabilities.
Higher Profit, Higher Valuation
By embracing digital optimization and transformation and changing your company’s culture to be agile and supportive of your transformation efforts, you stand to gain many efficiencies in your operations and processes that will greatly enhance your bottom line. With lower costs, you get higher profit margins. And with higher profit margins, your cash flow will sooner or later improve. Consequently, with a better cash flow, your company value increases.
Selling your company is not a light undertaking. It is a onetime event, so you want to seek to maximize its outcome. Doubling your profits can double the value of your company. This means that cashing out upon your exit can be twice as lucrative!
Treat Digital Assets as Assets
Many small companies’ CEOs neglect to account for digital assets. Many don’t know what digital assets are and never recognize them on their balance sheets. Unfortunately, your average accountant also does not know enough to understand digital asset values and encourage clients to account for them.
Just like any other asset, digital assets are real. In some cases, they may be intangible assets, but they are actual assets. For instance, a company that has spent years building its website and cultivating backlinks from authority domains has built a real treasure chest. The value of that chest can be measured and monetized by web experts. Backlinks are a tangible asset. So is digital content. They increase your website’s authority in the eyes of search engines generating higher traffic. The higher traffic leads to free leads and low-cost sales. If a perpetual free stream of leads is not an important asset, nothing is!
When you pay significant sums or work endless hours to create digital content and backlink, you are building your cyberspace presence. Yes, that presence is virtual, but it is real. It is akin to building a brick and mortar location. They are both an investment and they both should be on your balance sheet. You can allocate the cost of building digital content and backlinks to business expenses, or you can assign them to your assets and depreciate them over a time period. But their value remains while they generate traffic, leads and sales for you.
Calculate the Value of Your Website
The national SCORE organization website generates over a quarter of a million organic visits to its website. This monthly organic traffic is estimated to be equivalent to roughly half a million dollars per month in Pay Per Click (PPC) ads. This makes the SCORE.org website worth in the millions.
Furthermore, if you have a significant blog following or subscribers to a newsletter, or lead contacts in your CRM, you have accumulated a significant marketing and sales asset. These are again tangible assets that you can measure and assign a monetary value to.
Why shouldn’t these treasures be part of your balance sheet?
Larger companies add goodwill on their balance sheets. Digital assets are more tangible that goodwill. You can measure the number of landing pages, backlinks, and organic traffic along with its monetary value very accurately. You can count the valid leads in your CRM. You can track the open and click rates on your newsletter. All your digital assets should be part of your balance sheet and can significantly contribute to a higher valuation of your company.
Review Exit Strategy Yearly Along with Business Plan
It is important that you know all your options when it comes to pursuing an exit strategy before you undertake that effort. SCORE developed the Exit Strategy Canvas to educate CEOs about how to get their companies ready for an exit. Common questions like “what is my business worth? How can I maximize the value of my company? How do I locate buyers? How do I avoid being taken advantage of?” are all important questions on an entrepreneur’s mind when considering an exit.
SCORE mentors can walk you through that process and help you identify how to measure your digital assets and include them in your balance sheet to maximize your company’s value.
Timing & Executing an Exit is Not Easy
Experts tell you to sell your company at its peak to maximize the value of the sale. Since sale value is often a multiplier of sales, net income or cash flow, selling at the peak usually produces the best outcome.
But how do you know when you reached your peak? If your business is on the up and up, there is a good chance that you will continue to grow it in the upcoming years. Furthermore, if your business starts to decline, it could be due to downward economic trends like a recession. Recessions will not last forever and your business will rebound when they are over.
Your SCORE mentor can help you assess your company’s growth potential compared to your competition and industry key performance indicators (KPI). They can also help you compare your KPI’s against others in your industry to see if you are ahead or starting to get behind.
But also, very importantly, if you are a small business founder and owner, listen to your instincts as well as to the experts. It was you who had the vision, foresight and will to start that business. You know it more than anyone else. So, listen to what your gut tells you before you take any big decisions.
The Case for Keeping Your Company
In many cases and for many reasons, entrepreneurs regret selling their companies too early. One reason is purely financial. They often do not know how to invest their payout to achieve earnings that are commensurable with what their companies were earning for them. Low risk return rates these days are very low and barely ahead of inflation rates. This often leads to seller remorse and lower income.
For instance, let’s say your company is earning you $300K a year and you sell it for a cool million. After you pay debt and taxes, you are left with $600K-700K. Investing it today in a low risk investment portfolio like treasury bonds or munis will earn around $25K per year. While before you sold your company, you were among the top earners in the USA, now you are among the lowest earners!
Even if you have accumulated wealth over the years from your business, keeping your business is a way to diversify your wealth. Small companies are often private and therefore their returns are uncorrelated to the stock market. As a prudent investor, you want to stay diversified.
Many small business owners, particularly if they founded the business, get personally attached to it. You want to stay objective. You also want to maximize your total long-term net worth, not only your exit price.
If a Sale is Not Equitable or Feasible
It is no secret that most potential acquirers are often looking for minimizing acquisition risk, aka paying as little as possible for your company. When the offered exit price is not compensable with the company’s value or what you are seeking, consider other options. If the offer is fair but below your expected selling price, consider further digitalization and building your balance sheet with your digital assets.
If the offer is unfair, hold on to your company while seeking other buyers. Profitable companies are often worth retaining. By deciding to hold on to it, you can maximize its cumulative earnings potential.
Your backup plan can always be the soft-landing option.
When you are the sole business owner, you will always have the option of holding on to your company for as long as its life span allows. When the business stops netting you the profits that you seek and you cannot sell it, you can “soft-land” it.
This happens for different reasons. One common reason is disruptive forces in the industry rendering the business no longer viable. But disruptive forces are very hard to predict when and where they will have a terminal impact. GlobalVision is in the translation business. Experts have predicted the demise of translation since the mid-1950s. Sixty plus years later and they are still predicting its demise. By adjusting as technology permits and operating the business till the damage happens, you can potentially extend your income a lot longer than originally anticipated.
Another reason is stronger competition or the commoditization of an industry. Again, this takes some time to take place. Price erosion is usually the indicator. You can compete as a small business owner by becoming more agile and by optimizing your value chain. Digital optimization and transformation will help you in that process.
A common reason is the loss of interest of the proprietor in the business. This can be due to many reasons, chiefly among them, complacency, burnout rates, or lack of challenge. Again, pursuing a digital transformation strategy can help with all.
Reasons for Keeping Your Company
Not convinced yet? Here are reasons why you should seriously consider keeping your company for as long as you can:
It's taken you so much sweat, tears and blood to get here, so why sell the golden goose when it is finally laying you a golden egg every month, quarter and year? Often holding onto your company for 3+ years will net you more income than selling it. It will also maintain your full equity in the company and offer you a diversified portfolio.
Minimizes Exit Overhead and Distractions
By not constantly working toward an exit strategy, you can eliminate the overhead involved in getting it ready for an exit and take advantage of all legal tax incentives to reduce your tax payments. This will enable you to keep more of your hard-earned income and invest it in the company or elsewhere! This often also means that on paper, you are diminishing your profitability and therefore the value of your company. But if you are not selling it, who cares?! The lower value is only on paper while in practice, you are minimizing your taxes and maximizing your net income.
Also, working towards an exit demands time and energy. These are very valuable commodities for CEOs and business owners. They can be instead directed toward building the company’s sales and profits, including ensuring its digital transformation.
Maximizes Tax Deductions
Maximizing earnings is diametrically opposed to reducing taxes. By not pursuing an exit you are no longer required to increase the value of your company on its books. A CEO or a business owner can therefore seek legal ways to minimize taxes while maximizing earnings.
Invest tax savings in other ventures and diversify your portfolio to hedge your risks. Your business is a great way to enable you to build your wealth. But as mentioned before, savvy business owners should seek diversification.
Exit Options & Digital Value
Astute CEOs and small business owners should thoroughly understand all their exit options. This not only includes understanding the real present value of their business, but more importantly its long-term net potential. By adopting an agile culture across their entire organization, they can maximize both.
An agile culture will help you build a digital strategy that can increase revenue, reduce costs, streamline processes and prolong the life of your value chain. All are factors that can significantly increase the value of your company and selling price.
- Buying or Selling a Business
- In Business
- Accommodation & Food Services
- Agriculture, Farming, Fishing & Hunting
- Arts, Entertainment & Recreation
- Banking, Finance & Insurance
- Health Care & Social Assistance
- Home or Personal Maintenance Services
- Manufacturing & Industrial
- Professional & Business Services
- Real Estate, Rental & Leasing
- Retail & Wholesale Trade
- Technical & Scientific Services
- Transportation & Warehousing