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).