Call it exit planning, succession planning or transition. These terms are synonymous when used in the context of retiring and leaving your business. Exit Planning is a process not a single specific event. Exit Planning is a series of events over a strategic period of time – in other words, a process.
Four essentials and related facts about exiting your business:
Develop a Strategic Plan:
- An exit plan is a comprehensive road map to exiting your business successfully. This integrated plan addresses the personal, business, legal, financial, tax and estate issues involved in exiting from a privately owned business. Its purpose is to maximize the value of the business at the time of exit, minimize taxes, and ensure that the owners accomplish all of their personal, financial and business goals in the process.
- Businesses with succession plans generally sell for more than those without a plan.
- Good exit planning generally reduces and sometimes eliminates capital gain taxes, and increases net proceeds to the seller.
- Peace of mind comes from knowing that your exit plan will care for your heirs in the way you want, rather than letting the future take care of itself. After all, deciding how and when to exit a privately owned business is perhaps the single most important financial and personal decision in a business owner’s lifetime.
- Know your Business Value: As a business owner, you want to receive a fair value for your business. A successful exit strategy ensures that your business brings a top price. Small business owners looking to exit often allow the value of the business to decrease. Businesses are valued in many ways. Business Brokers almost exclusively use multiples of Owners Discretionary Earnings or Multiples of annual Revenues. Banks often use EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). These “Rules-of-Thumb “methods that use x times earnings or x times cash flows are not formal valuation methods, however they often serve as sanity checks for other more formal comprehensive valuation methods and give a good “sense of value” to a business owner. Professional valuers use more sophisticated and comprehensive methods acceptable to the IRS and financial institutions, and often be more costly. Whatever the case, understand the method(s) used and make sure the valuer is experienced in doing valuations for small businesses your size and in your industry.
- Know your Options: Determining the right exit option from your business is a challenge that many owners put off until it is too late. Windows of opportunity open and close. If you want to leave your business on your terms and on your time table, you must be proactive about understanding your exit options.
Here are some exit options to consider:
- Sell or give your company to a family member
- Sell your business to one or more key employees
- Sell your business to other shareholders
- Sell to an outside third party
- Bring in an outside investor and keep a minority interest
- Hire a management team to take over and you become a passive owner
- Liquidate your business
- Be Patient: It can take two to three years of focused activity to get your business ready to sell at a reasonable price, and another 12 to 18 months to consummate the transaction. A business owner often succumbs to the notion that the buyer knows more about the value of the business than the owner. Don’t be rushed into selling, but don’t let opportunities pass you by. Exiting can be as emotionally disturbing as a bankruptcy or it can be a quiet closing with all debts paid. You may get an offer that you can’t refuse – one that will set you up for life, or for your next business venture. You can plan to sell at a good time, take the money and run, or pass the business on to your heirs. Over 70% of small business sellers regret the sale a year after, for various reasons: financial, vocational, or simply a lack of something to do. When leaving your business, patience is a virtue.