An Exit Strategy

Whether you’re retiring or just wanting to step away, having a plan for the business is a must for any owner.

An Exit Strategy

Anja Smith

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When you started your plumbing business, you likely had a lot on your plate. What equipment to buy, how to find work, what to call the company, and a laundry list of other tasks and decisions. One thing that may not have been on your mind at that time is how you would eventually leave your business. 

The lucky ones have some sort of vision for retirement or ideas for the next stage of life. If so, the real question is whether the business operations and decisions are getting you closer to that vision or further from it.

For some of you hardworking folks, the idea of retirement is ludicrous. The fact remains: One day you will exit your business. That may be with one or both feet in a grave, but hopefully your legacy matters enough to do some planning. Where is all this hard work headed and how long will it last are two important questions for any business owner — this isn’t just a concept for fancy or big companies. 

An exit strategy is best defined as understanding where you want to go and what will happen to your business when you get there. A defined exit strategy will make an impact on the day-to-day running of your company, meaning the sooner you decide, the better. 

There are a lot of options for how to exit a company. Some are more common for a plumbing company than others. For instance, an initial public offering or becoming a publicly traded company is incredibly uncommon for any business. It is even more rare for plumbing companies.

But plumbing companies do trade hands often, remaining privately held and providing good jobs and good livings for those involved. Here are a few options to consider:

Employee buyout

This option wins the feel-good category. It is the equivalent of handing your business off to the next generation. A buyout can be an easy transition for employees and the owner, especially if you have someone you have been grooming for a long time.

For a plumbing company, this option has a lot of upside because qualified outside buyers can be difficult to find. It is a technical field with licensing requirements and regulatory concerns.

Sell to a competitor or outside individual

Finding a buyer to acquire you can be tricky and take time. The pool of qualified buyers for a plumbing company is small. On top of that, your numbers have to be impeccable, and you have to be willing to find a valuation both sides can agree on.

This type of sale usually involves a business broker, who can help you figure out the value of your business, find a buyer, and take care of the paperwork. Just like in real estate, that person expects a cut of the proceeds. For the owner, this usually means a clean exit and a large cash payout.

Ride the cash cow

If you have great systems and people in place, you might consider turning over operations but not ownership. A lifestyle business is one where the owner continues to draw profits from the company without working in it day to day.

This might sound like the ultimate dream, but remember, this isn’t a true exit. You aren’t walking away from this company and saying “good luck” — you have to be available for at least occasional decision-making. Consider that you may also have to step in if you lose key players.

Liquidate

Simple, and often heart-wrenching. If the value of your business, from an accounting perspective, isn’t more than the sum of it’s parts, you might consider liquidating. If you are a sole operator or feel like you “are” your business, this might be the right path. This means selling off your assets, paying off your liabilities, and moving on with your life.

HOW WILL YOU GET THERE?

The crucial point is that you don’t have to be ready or thinking about retirement before you start planning your exit. In fact, it is crucial that you begin planning well ahead of the exit strategy execution. The ends dictate the means, so once you have decided on an exit, you can work toward that future. This is why it is not just possible, but imperative that you consider your exit long before you are ready to make it a reality.

For instance, if you want to sell to an employee or group of employees or have a relative succeed you, that person or those people will need to be well-groomed for the responsibility. They will need to understand not just their job, but how to run the business. Don’t wait until your retirement year to start teaching them how the accounting, marketing and operations work. Typically, this person will be included in the upper management circle long before the transition takes place.

An outside sale, on the other hand, requires squeaky-clean accounting and operational excellence to maximize value. People want to buy opportunity but not a mess. You will have to demonstrate, on paper, that the company has value without you. 

Agreeing on exactly how much your company is worth can be a touchy subject for many business owners. You see the best in your creation, not the flaws. Fortunately, there isn’t much emotion in it. In a service industry like plumbing, it is common for the value to be placed at a multiple of cash flow. An accountant can calculate this for you if you don’t know how.

Knowing the potential value of your company is a great litmus test to determine if you are on the right path. If you want to consider selling your company, you will want to prioritize strategies that increase the cash flow, decrease liabilities, and otherwise sweeten the pot for a potential buyer.

WHAT WILL LEAVING LOOK LIKE?  

Life doesn’t always go according to plan. You may get to your planned exit date and not be ready to leave. Conversely, life events may require that you exit sooner than you planned.

This might sound like a scary prospect or an exciting one, but the good news is you are in control of how prepared you are for that day. Be willing to change your plan if circumstances change and play to your strengths.

It’s OK to have torn feelings. Exit strategies can seem stressful or bittersweet when thinking about how you are going to “quit” your business one day. Think of your exit strategy as insurance, giving you the ability to hit the curveballs that life throws your way. Along the journey, you might find yourself running a better company for it.  



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