Pointers for Crafting a Lucrative Exit Strategy

I haven’t known many kitchen/bath dealers who have retired from this industry as wealthy individuals. However, all of those who have retired probably banked on getting a lot more money from the sale of their businesses than they did.

It must be disheartening for owners to have loved a business so much for so long, and then not realize what they think that business is worth, particularly when they counted on the proceeds to finance so much of their sunset years.

To avoid such a disappointing scenario takes good, solid planning. In my judgment, there are several essential considerations that must be addressed to ensure a lucrative exit strategy.

Written Strategic Plan

Nothing beats a written strategic plan to get your business in shape to command a premium price. Unlike the conventional business plan that is drafted for startups, a strategic plan defines what your business will look like when it’s completed. It forces the owner to put his or her vision for the business in writing.

Now it’s relatively easy to carry around some vague ideas in your head of what you hope your business will eventually become. But putting those ideas down on paper in a cohesive, cogent manner has proven to be far more difficult.

After drafting a vision, the next step is to unbundle that statement into a number of written operational definitions. Measuring each of these operational definitions on a scale of 0-10 (10 being the highest rating) is called a “gap analysis.” Each year, owners establish “critical success factors” that must be accomplished to “close the gap” on the weaker-rated operational definitions.

The ultimate objective is to score nines and 10s in all operational areas of your business. Of course, it may take many years to realize this objective – a good reason to commence this process 15 years or more before you expect to sell the business. For more details on this topic, please review my Nov. 2004 column entitled “Seeing the Future, Profiting Today.”

Funding of Retirement Account

In all the years of interactively budgeting a business with owners, I am amazed how few dealers routinely fund retirement accounts for themselves and their employees.

Retirement accounts are a deductible expense to a business. And, presented properly to staff, they should be an extremely valuable perk that enables a business to retain quality personnel. After all, even funding small retirement sums every month for each employee can lead to a pretty healthy individual retirement account after 20 or 25 years. That’s the magic of interest compounded annually, coupled with a 9.6% average return over the last 100 years of the stock market.

One of the many values of belonging to an industry buying group is the quarterly rebates paid out on your purchases from the group’s Preferred Vendors. This “found money” can add up to tens of thousands of dollars that many member-owners are using to fund their retirement accounts.

If you are in your fifties and without a retirement account to your name, I would suggest two key courses of action. First, establish a SEP-IRA in your business. This type of retirement account bears the lowest administrative expense and provides the best opportunity for owners to sock away the greatest amount of money. For example, 25% of one’s salary can be invested in a SEP-IRA to a maximum of $46,000 annually.

The same percentage must be invested for all full-time employees, which is why some savvy business owners will limit administrative staff to 30 hours per week.

The SEP-IRA percentage amount can change from year to year. Indeed, if your business is suffering from a deep recession, you are not obligated to fund a SEP-IRA at all. On the other hand, you can budget and pay out 10% in retirement funds each month and, if the business ends up with a hefty profit at the end of the year, you can bonus out an additional percentage up to 15% payable by March 15th of the following year (for C corporations).

Second, I would find a Certified Financial Planner (CFP) to draft a retirement plan for you. These professionals work by fee only. As a result, you can be assured that Certified Financial Planners will provide only objective financial advice since their income is not dependent upon the earning of commissions.

Most CFPs charge about $125-$150 per hour – with the average retirement plan costing $500-750. For example, a CFP may recommend a series of no-load mutual funds to buy on a monthly basis from the local Charles Schwab or Fidelity office. Then you should have your investment portfolio rebalanced by the CFP every 12 to 18 months so you remain on target to achieve your investment funds goal by retirement age.

Target Market for Sale

“Your business is only worth what someone is willing to pay for it” resonates as a true statement to me. That said, how well you plan for the sale can have a huge impact on the final price.

In my opinion, you should begin with the end in mind: Who would be willing to pay the most for your business?

Family members might be a consideration to perpetuate your company name in your honor, but they are unlikely to pay full price. Key employees might be interested in buying the business if only to keep their jobs, but they may not be able to secure the necessary financing for lack of collateral. A related business – like an appliance store chain or lumberyard – might find your business highly attractive, but they may want to have you stay on as general manager for longer than you find appealing.

In the final analysis, the target buyer most willing to pay your price probably would be a white collar corporate executive who wants to get out of the rat race, be his own boss and spend more time with family. He already has extensive management and marketing training that can be leveraged (in his mind) to further grow your operation.

He has the cash invested in a liquid portfolio to make a handsome deposit. He also has sufficient assets to collateralize a bank loan for the balance. And he has probably been researching for the last year to either buy a franchise or buy a local, reputable business. In fact, he may have put the word out with accountants, lawyers and business brokers in your city that he is in the market to buy a good business.

Timetable for Business Sale

Detailed below is a realistic timetable for what needs to be done in advance of launching a marketing effort to white collar executives:

  • 15 years out – complete a written Strategic Plan so your business will score 9s and 10s in all operational aspects of your business.
  • 8-10 years – convert from a C to an S corporation to avoid double taxation at time of sale.
  • 5-8 years out – shift your business model from a “studio” operation where you, as the owner, close all the sales to a “showroom” operation where you, serving as a Sales/General Manager, direct your former team of Design Assistants, now elevated to Sales Designer positions; additionally, all personnel are thoroughly trained on a management information software program like the SENergy Business System.
  • 5-6 years out – begin build up of Retained Earnings and overall Balance Sheet
  • 1-2 years out – secure a favorable business evaluation; hire an agent to market the business and broker the sale

The two most likely parties to sell your business at a premium price are (1) a local business broker or (2) an investment banker for small businesses. The former may ask for a marketing fee up front as an advance against his commission; incidentally, a broker’s typical 10% commission is totally negotiable. The latter usually gets $8,000-$10,000 for a business valuation and a marketing plan, and then a “Lehman scale” commission for the sale of the business; this scale pays 5% on the first million dollars, 4% on the second million, and so forth.

Viable Alternative to a Sale

Now it could be that, as you near your designated retirement age, you begin to think differently about the sale of your business. Perhaps you have followed your written strategic plan so well that the operation is running very smoothly – with experienced sales, administrative and production staff people in place – and excellent net profits being generated on a regular basis.

Perhaps you have the entire staff using a Web-based, management software program so well that you realize you can monitor the business’ progress from anywhere in the world – like from an Internet café in the south of France.

So you kick yourself upstairs as a Chief Executive Officer (CEO) to focus only on strategic planning and marketing, hire a Chief Operating Officer (COO) to manage the business on a daily basis, roll back the number of hours you work to 15-20 per week at 80% of your regular salary, maintain all your perks including health insurance, long term care insurance and monthly retirement contributions, and take a month each quarter to experience a different place in the world. Maybe you realize that such a relaxed workload would be fun, and one that you could easily enjoy for another five to 10 years.

Wouldn’t that be an attractive alternative to selling your business on the original timetable?


Ken Peterson, CKD, LPBC, is president of the Chapel Hill, NC-based SEN Design Group and an instructor for the “Road to Recovery: Best Business Strategies for 2011” seminar, co-produced by KBDN. Peterson can be reached at 1-800-991-1711 or kpeterson@sendesign.com.