Consider exit strategy when opening business

Gary Rogers, CBI, is a partner in Business Brokers Unlimited LLC. He specializes in exit strategies for business owners.

As a new owner of a small business, whether it is a start-up or an acquisition of an existing business, one of the last things on your mind is an exit strategy. In the beginning, your main objective is to get control of the initial challenges and to survive the new business daily-crisis dilemma.

However, any business owner who has survived a few years and is contemplating the sale of his or her business will tell you, "I wish I'd known when I started what I know now." Business lessons learned too late in the process may prevent you from receiving the maximum value for your business when it is time to sell it.

When preparing to start a business, numerous business decisions must be made. You should seek advice from a reputable certified public accountant with extensive experience in working with small businesses. A CPA will help you determine which type of taxable organizational entity is best for your business. Should it be a sub-S corporation, a C-corporation, a limited liability company or a professional corporation? The type of organizational entity you chose could have a significant effect on the tax liability you have over the years. Not only on an annual basis, but also when the time comes to sell your business.

Before you make a decision on which type of entity will be the most appropriate, you and your advisors should discuss exit strategy options. At some point, how you exit the company will be very important. For example, if you have a small family business you intend to leave to your children, your strategy will be different than if you plan to work hard in your business for the next 10 years, and then sell it to a nonfamily member. Exit alternatives may also have an impact on the after-tax value you receive from the sale of your business.

As you invest years of work to build your business, it is important to invest the same amount of effort and concern in maintaining accurate accounting and tax records. The more accurate your accounting records and the more income you can demonstrate over time on your business tax returns, the higher value you will receive at the eventual sale of your business.

Think of the end from the start. The outcome when you sell will be much better if you are diligent in your record keeping. Don't let things slide, trying to get by with only a minimum investment of time and effort. Likewise, ensure that you report every dollar of revenue that your business receives. The long-term gain in the value of your business will offset any worry you might have about paying too much income tax.

As a small-business owner, the relationships you maintain with your clients and/or customers are vital. And more importantly, how your customers or clients appreciate your business will have a critical effect on the ultimate value of it. In fact, there is a direct link between strong customer loyalty and good financial results. More often than not, the long-term value of customer relationships has almost as much impact on the value of your business as the financial numbers reported.

Relationships with vendors, suppliers, sub-contractors, etc., are important. When measured by excellent pricing and quality materials for your purchases, strong vendor or supplier relationships may have a long-term value. Motivate your suppliers to provide maximum value to your business for the cost you are paying.

Another often overlooked relationship that has significant long-term benefit to the business value is the relationship you develop with a banker. Build a strong, personal relationship with your banker. The stronger the relationship, the better loan terms and conditions you will be able to receive, especially when you need access to capital to fund the growth of your business. Be prepared to change banks if your banker isn't interested in developing a solid relationship with you.

The time to think about the potential sale of your business is not just before you want to sell it. Begin your business plan with the end in mind. And, when that time approaches, a wise business owner will talk with professional advisors including an attorney, accountant, and a business intermediary or business broker.

A reasonable time frame to begin discussions with your team of advisors is one to two years prior to actually listing your business for sale. This way your advisors will have time to assist you in positioning your business for maximum value, after taxes, at the time of sale. Of course, circumstances do not always allow for that amount of preparation time. The primary recommendation, regardless of your time frame, is to obtain the counsel of professionals who will help you achieve the optimum return for your years of investment.