Exit strategy: Preparing for the sale of your business

Small-business owners say they love the freedom, flexibility and earning potential of working for themselves. But Joel Martin, the former owner of a $20 million New York-based advertising agency, said no one should go into business without an exit plan. Even if you've only begun your venture, there are ample ways to prepare for its sale, she told members of the National Association of Women Business Owners (NAWBO), who were in Phoenix for the group's 30th annual national meeting.

The National Association of Women Business Owners (NAWBO) reports that more than 10.4 million women now own businesses in America, and between 1997 and 2006, majority women-owned firms grew at twice the rate of all firms. Women-owned firms now account for 41 percent of all privately held firms. Small-business owners say they love the freedom, flexibility and earning potential of working for themselves.

But Joel Martin, the former owner of a $20 million New York-based advertising agency, said no one should go into business without an exit plan. "Building a business worth a fortune isn't enough," Martin said. "You need an exit strategy as a way to get your money back out, but also to ensure your business reaches its full potential. Even if you're attached to your business and not ready to sell, plan ahead anyway."

In the U.S. more than 2 million businesses are sold every year, she said. The business broker industry is expected to double over the next three years. Roughly 18 to 25 percent of all businesses listed wind up being sold. Owners want to sell for multiple reasons, bu whatever the reason, she said, there are ample ways to prepare yourself for the sale, even if you've only just begun.

Preparing for the sale

First, market your business well. Develop a solid marketing strategy, knowing who your customers are and why they do business with you. And build a strong brand. Martin quoted Tom Peters, a management consultant and marketing guru, who said that the business owner's most important job is to be head marketer for the brand called "You."

"This contributes greatly to your buyer-appeal," Dr. Martin said.

Having a niche is also essential. Martin built her agency, JPMartin Associates, Inc., from nothing. Martin grew up poor in Harlem, and when building her company she canvassed for clients by going door to door to businesses with her toddler daughter in tow. She took on a corporate account, initially for free, gaining experience that she parlayed into credibility with companies that might otherwise have ignored her.

Once you get that first impressive account, measure the results and exceed expectations in every way, because other prospects will respond positively, she said. JPMartin's tagline became "creative solutions to marketing problems." Being bold gave her agency visibility in the competitive New York market, she said. Eventually JPMartin won the Anheuser-Busch account. Other corporate clients in the ethnic, women, and youth segmented markets followed.

Martin said she built momentum by nominating herself for awards, and then writing releases about them. She attended conferences, read books on her industry and wrote articles. She also became a featured speaker in the advertising industry — all helping her grow the brand and establishing her as an expert.

As the profits grew the media noticed. She was profiled by Essence magazine, the New York Times, Fortune magazine, Black Enterprise and Working Woman. She was also a guest speaker on the "Today Show." "Like the refrain from the movie Field of Dreams, 'build it and they will come.'"

Logistics

Before business owners can attract solid buyers, they must tend to logistics. Martin wrote up a manual for every procedure at her business. "It looks organized and professional to hand your buyer a bound copy of every procedure that has made your company thrive." And it's not a bad idea to have your policies patented, too, she said.

Next you need to establish value. Conference participant Meg Carlson is principal broker at the merger and acquisition firm C&H Group. Companies worth under $2 million are typically sold by a broker, she said, while companies worth more are sold by an M&A advisor. Buyers want to know about the operation of your business, its liabilities and assets such as inventory, the financials and the people.

Carlson said that advisors offer independent evaluations for around $4,000, but the fee can go up as high as $20,000 "depending on the complexity of the business and how good your financial and legal records are." This process helps a business owner decide the right time to sell, both financially and emotionally. To determine a company's worth, advisors research its records and determine profits.

They also use the rule of thumb approach, Carlson said. Each industry has a rule for determining the value of a company. For car wash businesses, for example, advisors determine the most recent 15 months of sales revenue, and add the estimated market value of market assets (like washers) and the real estate. This determines the price. For a PR company the rule is different, Carlson said.

Next the M&A advisor/broker identifies offers and pursues the strategic buyers, because they will pay the most, Carlson said. She finds that most buyers purchase a company for growth. Martin added that a buyer may want your market share for future or existing products, your team and talent, or your product line or services. Evaluations are time-sensitive.

The market moves so much that evaluations older than a year become invalid; most have a shelf life of six months. Participant Suzi Dafnis, an Australian businesswoman who founded a successful events company called Pow Wow Events International in Phoenix, Arizona, learned a lot through its sale.

The company handled events, seminars and publicity for authors and musicians worldwide. When Dafnis was ready to sell, profits weren't actually all that high, she said. The promotions industry was in the doldrums and her revenues were not at their peak.

The buyer approached her simply because he wanted an Arizona presence. "I didn't have to sell that hard," said Dafnis who used her profits to become "officially retired." She now heads the Australian Businesswomen's Network, a non-profit group, and has been named one of Australia's most successful business women.

Exit strategies

Owners who are ready to sell find will some kind of path to the door, Martin said — some paths more strategic than others. One way out is bleeding the business until it dies — taking a big salary until there is little left for reinvestment. Another is the "pass it forward" exit — passing the business on to a regular customer, children or neighboring business owner who will preserve your legacy.

Martin said that women business owners are nearly twice as likely as men to pass the baton to a daughter (37 percent of women versus 19 percent of men operate this way). Another approach is the "walk away and close the doors exit." When you do so, your client lists, reputation and business relationships are liquidated and you abandon the chance to recover their value.

This is how Martin proceeded when she sold her advertising agency, and she sadly told the audience that she regretted it. Martin had wanted a career change. While president of JPMartin she had launched Triad West Training, a consulting and coaching company that also handles productions and events. She had found her true calling, she said.

She was making a difference in the lives of others, and she said she found this more rewarding than selling beer. And so she returned to school for a Master's and then a Ph.D. degree. Paid to travel around the world as a consultant and speaker, Martin allowed the advertising agency to wind down. Knowing nothing about how to sell a business, she watched her creation liquidated at far below its previous market value, and she was devastated.

Since then, Martin has gone on to author books and to build a new brand, Positively Powerful. She closed the talk with a quote from Oprah Winfrey: "Right now we are one choice away from a new beginning — one that leads you toward becoming the fullest human being you can be...I am on the way again," Martin said.

Bottom Line:

• More than 10.4 million women own businesses in America and between 1997 and 2006, majority women-owned firms grew at twice the rate of all firms.
• Women-owned firms account for 41 percent of all privately-held firms in the US.
• Joel Martin, author of How to Be a Positively Powerful Person, owner of Triad West, Inc., and previous owner of a $20 million advertising agency, said that in the U.S. more than 2 million businesses are sold annually.
• The business broker industry is expected to double over the next three years.
• Roughly 18 to 25 percent of all businesses listed wind up being sold.
• Women business owners are nearly twice as likely as men to pass the business on to a daughter (37 percent of women versus 19 percent of men) Martin said.
• Martin said that every business owner should have an exit plan, regardless of whether one is ready to sell.