As we head into the strategic planning season and begin executing strategy, take a few moments to consider the legacy you want your business to leave. Will it continue on indefinitely or pass to your children or employees? Do you plan on cashing out or will it just cease to exist? Many entrepreneurs are not clear about what their businesses will look like without them – leaving their exit strategy to chance instead of intention. Bottom line – business ownership will someday be transferred either due to careful planning, death or unforeseen life changes.
Studies show us that a majority of owners are in denial or just postponing the inevitable. Here who is and a few reasons why you don’t want to be part of the majority:
- Only about ¼ of businesses with less than $200 million in sales have a formal exit/succession plan.
- A study of more than 5,000 franchised business showed that only 24% were sold and 76% essentially closed their doors with some possibly being liquidated.
- A survey of thousands of business owners concluded that most misjudged the value of their business by 50% or more, some resulting in million dollar differences.
- Without a reasonable plan developed, the owner will undoubtedly receive a much smaller financial return than he had considered appropriate.
- A strategic buyer will generally pay a higher price than a financial buyer. Seeking a strategic buyer can require research and extra time.
- Most family businesses need to increase profits or grow by at least 15% to cover the cost of transition.
Knowing your options Of course the reason why the majority of business owners avoid this entire discussion is because it is not an inspiring topic. But setting a clear exit strategy is imperative to ensure your years of hard work pay off in the end. Knowing your options and a few best practices can make this task seem less intimidating.
Even though exit planning and succession planning are used interchangeably, there is a distinction that should be understood to adequately manage the overall exit process. The first phase is the process of directing how to transfer the business when you exit – exit planning. The second phase is determining who will run the business upon your departure – succession planning. There are basically four ways to exit your business:
- Transfer ownership to a family member,
- Sell to employees or other owners,
- Sell to a third party, or
A frequent question asked is – when should the entrepreneur-owner start the exit planning process? The resounding answer by all experts is – NOW! The ideal timing is when a venture is started, launched or purchased. Numerous long-term financial considerations are developed at the initial stages that will impact operations for years.
Exit planning is an important ingredient of you and your organization’s strategic direction. Consider drafting your own personal vision statement for your business, which includes your exit strategy. This does not need to be shared with your staff, but can guide the strategic growth of the organization.
Six key considerations for exiting No matter whether the entrepreneur is considering an outright sale or deciding to groom another to lead the business, a strategy is an absolute necessity. Here are some critical considerations to start developing your exit strategy:
- Timing – When is the right time? Timing has an impact on the quantity and quality of buyers.
- Value – What is an arm’s length value for your company? Generally time is needed to maximize the value.
- Succession or sale – What is the appropriate selection process or training that is necessary for a smooth transition? The next section discusses elements of succession planning.
- Income tax considerations – What is the impact of Uncle Sam? Maximizing value requires reducing income taxes as much as possible.
- Separate self (management) from the investment – How will you separate yourself from the value of the business? You want the investment to stand alone, without your involvement.
- Purpose beyond business – What are you going to do after the transfer? Don’t wait until after the sale or exit to answer this question.
Preparing for a smooth exit Once you’ve determined how you can exit the business, succession planning helps you determine who will run your business upon its transfer. (Naturally, this is relevant for all exit strategies except liquidation.) The key point is to exert input now while you still have ownership and control. No one knows the business better than you – no one. So take advantage of your current situation and provide for a successful succession. Here’s how to make sure it’s a smooth transition:
- Update or establish your strategic plan so it can be used as the guide for your successors to maintain financial stability and future growth. You want your successors to be successful as undoubtedly your financial future is intertwined with your business’s future success. Therefore take adequate time to develop a complete strategic plan so your successors will have a steering wheel to guide the business safely through the competitive marketplace.
- Write a job description for your successor(s). You know well the requirements of the position that you will be vacating.
- Develop a training program for your successors(s). You know the needed skills and knowledge to be competent in your current position.
- Formalize and communicate the plan to all interested parties. Whoever your successor(s) is, there may be disgruntled family members and/or employees. You will need time to resolve sensitive issues. This aspect includes creating all necessary legal documents.
- Create a management or love letter for your spouse. In the event of an untimely transfer, your spouse needs to know how you would handle the situation, what your current goals are, who can be trusted and relied upon in the current management team, and who would compose a dependable board of advisors.
Helpful resources Developing sufficient responses to these critical considerations and eventually setting a solid strategy can be easier with outside expertise and resources. Best practices suggest that you assemble a group of trusted advisors to help protect your assets and future desires. The group should include the expertise of the following: CPA with estate planning experience, estate attorney, valuation expert, financial planner or money manager, and life insurance specialist. Additionally, here are a few free resources to start the process: www.cashing-out.com; www.buysellbiz.com; www.thebizseller.com.
What you can do today As a business owner, you have goals and aspirations for the business you created. For most of us entrepreneur-owners, we do intend to exit our business someday. Clearly, a strategy is necessary to ensure orderly transfer of the business for maximum value to obtain sufficient resources for your financial goals. Based on the information provided, what are three things you can do to move your exit strategy forward this coming year? To guarantee a lasting legacy, start thinking about tomorrow today.
For more information: If you have any questions regarding these articles, or desire further information, pleasecontact us.