Posted by: Fernando Simo
on Nov 04, 2009 
Tagged in: Untagged
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In one of my recent articles, I discussed profitability (Owners Benefit) as one of the key elements in determining a business valuation. I mentioned that if a business generate limited or no cash flow, it normally can only sell its tangible assets—receivables, inventories, furniture and fixtures and equipment.—for a nominal amount. Yes, you may get more than the book value, but I find it very rare. Unfortunately, over and over again, sellers come to me wanting to sell their business at a point of no return—where the business generates no profit or negative cash flow.
Believe me, I certainly can not be too critical of those sellers—I have been there. I know how hard it is to let go of a dream. However, that is precisely why I feel obligated to write this article. That’s why I recommend an Exit Strategy.
So what is an Exit Strategy? The dictionary describes it as “a means of escaping one’s current situation, typically unfavorable,” or a method by which business owners intend to get out of an investment, cash out or sell off. Obviously, and exit strategy should be developed prior to entering into the business transaction, but if you have not, do it now!!
The strategy may include questions such as the maximum cash to invest prior to disposition; the total acceptable amount in total retained losses—normally called Stop-Loss in the stock market— and the trigger valuation for upside and downside sale of your business, among a few. In other words, establish trigger points under which you will take some action to dispose of your business—good or bad!!
Ok you ask, so what is the purpose of an exit strategy? The purpose of an exit strategy is to allow enough time to sell your business in good and bad times, knowing, to some degree what the outcome will be.
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