We talk a lot about building businesses to create income for you, the owner. And when it comes to income, we want ALL types. That includes earned income, leveraged income, passive income and recurring income. But at some point, you may be ready to move on from that business.
What is your exit strategy?
Ted’s Excellent Business Adventure
Ted had been a client of mine for years. I became his CPA shortly after he quit his job and started a business based on his unique skills in a B 2 B (business to business) service-related business. It was a narrow niche and he soon became very well known. His team custom-manufactured a very specific type of equipment and then they repaired them.
The work he personally did was considered earned income. He had to show up to get paid. He trained some employees to handle elements of the work, particularly the manufacture of the specialty equipment. That was leveraged income. He was involved, but not in every step of the work. His time and expertise was leveraged.
He was interested in building out his recurring income. We spent a couple of consultation appointments brainstorming, designing and then documenting the action steps. It was a written blueprint for creating a unique recurring income model for his business.
Obviously, he was the expert in his field. That wasn’t my role. I was there as a sounding board and then to help him design and document the systems. And, of course, we also came up with the best tax strategies to handle the various types of income that he would receive from his business with the new business plan.
The recurring income model he would use was basically a service plan. He (and his top repair people) developed a list of things to check that would let them know when something might be showing undue wear and tear. He found that if his people regularly showed up every quarter, the number of repairs went way down. It was regular income for the business and it was a cost-effective solution for his clients. Most important for his business model, he was better able to plan his employee’s time. It didn’t require late night emergency visits but rather was scheduled maintenance appointments. That meant happier employees.
Besides providing proven stats that the cost and frequency of repairs kept costs down for his clients, he also offered a 20% discount on repairs for any business that signed up for the recurring maintenance program.
And finally, best of all, he didn’t need to be personally involved in the regular maintenance calls. By adding this profit center, he reduced his earned income and increased his leveraged and passive income from the business. And because the recurring income was based on a regular schedule, he didn’t have to worry about constantly selling. Recurring income increases the lifetime value of clients.
That was when he started talks with the big dog business in his field. They made an offer, that was accepted, subject to due diligence. Next, the lawyers and accountants got involved. In the end, the big dog business backed out. They were happy with the numbers but it wasn’t quite the model they wanted to add to their portfolio.
That’s when one of the owners took Ted aside and gave him some advice that changed everything.
“We really only want your recurring income model,” he said.
And right now, the recurring income wasn’t big enough in relationship to the rest of the business. The prospective buyer suggested that Ted build up that part of the business. Maybe offer some other levels of service. Make sure it was all well documented with written systems.
He just did exactly what had been suggested. Two years later, his business gross income had actually gone DOWN. But his time in the business was just a fraction of what he’s spent before. He had created a systemized business that worked so he didn’t have to.
He reached out to the big dog business again and this time they consummated the sale. There was one big difference.
He sold it for double what he’d been offered before, even though the income had gone down.
The systemized recurring income was much more valuable than the job he’d had before, where he had to do most of the work.
That leads to one of the first tips if you’re planning to sell you business.
Document Your Systems and Build Your Business Value
Document your systems. Train your employees to use your systems. And enforce the use of the systems.
That’s how to create a business that you don’t need to work in, day and night. You can create passive and leveraged income with systems. And even better, you can create passive recurring income.
It’s also the one thing you can do that will add value to your business faster than any other action. Buyers want systems, proven systems.
A good exit plan starts at least 2-3 years in advance of the sale. Consider who your buyer would be. Why do they want your business? What do you offer that would be of most value? What can you do to put your best foot forward?
Determine Your Business’s Value
Before you start shopping for buyers, make sure you know a fair price for your business. Take the emotion out of it and get a business valuation. That will help you narrow down your list of potential buyers. And with that information you can target the best buyer.
Your buyer and the team will want to substantiate the numbers you’ve shared about your business. That means you’ll need to show good financial statements that have proper back-up as proof. If you’ve hired family members and provided benefits outside of the norm, document that as well. Often owners of closely held businesses will have business deductions that may not carry on to the new owner. Show that as well.
What Happens After the Sale?
You’re about to sell something that has been an integral part of your life for years.
What happens next? Many of my clients take a few years to travel and do the things that they hadn’t been able to do because of the demands of their business.
Then what? There will likely come a time when you’re tired of the parties and traveling and you will want to do something different. What is your next step on your journey? Don’t forget to think about this.
Don’t Forget About the Tax Planning
It’s never too early to start thinking about tax planning for the sale. Will it be ordinary income? Capital gains? A sale of assets? A sale of stock? If it’s a stock sale for a qualifying corporation, you may be able to do the whole thing without paying any taxes at all.
But that type of strategy needs planning in advance. Can we help us with your plan to build your business and eventually sell? Contact us.