Why Small Business Owners Should Always Have An Exit Strategy

Hundreds of thousands of new small businesses (SMBs) open their doors every year in the U.S., be them physical or digital. The latest estimates from the Small Business Administration (SBA) peg the number of new SMBs at 414,000 each year, spurring job creation and economic growth for the country, with millennial entrepreneurs at the helm.

The high failure rate of a new small business has entrepreneurs focused on simply surviving their first few years in operation. Yet, once a company starts to churn a profit, business owners rarely consider their strategy of an eventual exit or sale. It’s an important piece of the small business lifecycle to consider, said Blake Hutchison, CEO of Flippa, an online marketplace through which SMBs are bought and sold.

“There are two main challenges for a business owner when it comes time to sell,” Hutchison told PYMNTS in a recent interview: how to price the business and how to aggregate financial data into a presentable state for prospective buyers. Think of it like buying a used car — one wouldn’t spend the money without first looking under the hood, viewing accident and incident reports, and taking it for a test drive.

“We use the car analogy a lot,” Hutchison said. “You would never buy a car without taking it for a test drive. Similarly, with a business, we ask prospective buyers to imagine themselves in the driver’s seat.”

Potential buyers may ask for a lot of information. When considering the purchase of an online small business, for example, a buyer may want to see stats on registered users and active users, how many users make actual purchases, the historical growth trajectory of the business and the like. However, the two most critical pieces of information buyers need include a verification of revenue and a profit and loss (P&L) statement.

None of this information can be easily collected or presented to a buyer when small businesses are running on spreadsheets. While questionnaires are an important piece of the process when gathering data on a business, buyers are demanding more concrete evidence that a small business is profitable.

Cloud Accounting, Data Sharing

The rise of cloud accounting has been a game-changer for SMBs, Hutchison said, and not only because it can provide a quick snapshot of a company’s financial health. Indeed, easy access to that information can help a company survive its first few years and, ultimately, thrive. Yet, cloud accounting has also emerged as a valuable tool in the ultimate exit of a small business, too.

Much in the way cloud accounting platforms like QuickBooks Online or Xero can integrate directly into back-office platforms to extract key financial information, companies like Flippa can connect to those platforms to extract the P&L and verification of revenue data that prospective buyers need. Looping into QuickBooks Online, BigCommerce, Shopify or the Amazon Seller Dashboard means buyers can see copies of store performance details directly from the source.

“Now, when I log into my accounting software, I have a direct data flow from my revenue source,” Hutchison said. “I’ve got a better view as to how my business is performing, not only when you start your business, but when you actually exit and sell — which most small businesses don’t give any thought to.”

The burden of paperwork and documentation required when selling a business can catch an entrepreneur off guard. However, the continued adoption of cloud accounting, and the digitization of the enterprise overall, have lowered that burden for both the seller and buyer.

“It has truly changed the game as it relates to giving small business owners the opportunity to get an on-the-spot check of the health of their business, and act like an enterprise in the event of a sale or even raising capital,” Hutchison added.

An Emerging Market

As baby boomer entrepreneurs retire, they’re often looking toward millennials to take the reins of their businesses: 2017 was a record year for small business sales, according to BizBuySell data, with analysts predicting a continued increase. While millennials are starting new businesses at a slower pace than baby boomers, millennial SMBs actually outperform the older generations in areas of revenue and business growth — meaning there are more small businesses ahead that will be viable for sale moving forward.

Hutchison said that, over the next 10 to 20 years, the U.S. market will see an increase in small business exits, totaling trillions of dollars’ worth of assets, even amid talk of an economic recession ahead. That presents opportunities for FinTech firms, like cloud accounting providers, to address the many unknowns an entrepreneur faces when starting the exit process.

As the valuation, pricing and analysis methodologies become better understood, and as the volume of sold small businesses increases, other opportunities will emerge in areas like escrow services and payment service providers, which can handle the actual transaction component of a business changing hands. For the small business owner, the opportunity lies in adequately preparing for an eventual exit.

“The number of small businesses selling and exiting each year is growing year on year,” said Hutchison. “Regardless of the state of the economy, all businesses come and go, and small businesses will always look to find a path to exit at some point.”