Although you invested significant time in constructing your business plan, if you are like most closely held business owners, you do not have an exit plan. In survey after survey, business owners overwhelmingly agree that an exit strategy is important. Interestingly enough, however, only an estimated 28 percent of private business owners have done any exit planning.
What is exit planning? Exit planning is the process of ensuring the future success and continuity of your business after you retire. Your exit plan addresses business, personal, financial, legal, and tax questions and includes contingencies for illness, burnout, divorce, and even your death. Ideally, your exit plan should maximize the value of your business at the time of exit, minimize the taxes paid, and position you and your family to achieve your future goals.
The failure to create a well-defined exit plan virtually guarantees that hard-earned wealth will be left on the table come retirement. If that’s the case, however, why do so few business owners have one? Some may mistakenly believe that planning can wait until just a few years before their target retirement date. Others find it tough to think about leaving the business that has sustained their family, perhaps for generations. However, in my experience, the true culprit for the lack of advance planning appears to be a combination of good old fashioned procrastination and general uncertainty on the proper steps.
If you need motivation, consider this: Closely-held businesses constitute one of the most important, dynamic and growing segments of our economy. According to CMI Research, these businesses account for nearly half of private sector payroll, have generated approximately 80 percent of net new private sector jobs in the last 10 years, and produce more than 50 percent of non-farm private gross domestic product (GDP). Additionally, the vast majority of the wealth set to transfer to the next generation as the Baby Boomers retire is held as stock in more than 12 million privately owned businesses. During the next 10 to 15 years, more than 70 percent of these companies are expected to change hands.
Accordingly, while it is always better to plan in advance, a head start in exit planning may become increasingly beneficial as the large numbers of Boomer business owners seeking to sell their businesses tip the normal balance between supply and demand. As the number of businesses up for sale outpaces the supply of buyers, advance planning will be even more advantageous for potential sellers.
So, how do you begin to think about, and eventually execute, an exit plan for a company that has been your lifeblood? Consider these steps:
- Re-visit your mission. What is the purpose of your business? What defines success for your organization? What goals would you like to accomplish and how much time do you need to achieve them?
- Assemble a professional team. In addition to an independent wealth manager, legal counsel and a CPA, you may also need to engage a valuation expert or a business broker. Professional expertise and advice in these areas will contribute to an efficient process and improve the outcome.
- Value your assets. Perform a physical inventory to help you establish the value of the business and make decisions. Later, that inventory becomes the basis for tax calculations. Determine what valuation approach you will use and consider the tax implications.
- Consider your deal’s structure. Will your sale be a one-time transaction or will payouts be spread out over multiple years? Will you stick around to provide a smooth transition and to ensure client retention? If so, what are the terms of the agreement? Will your staff be retained?
- Scout out buyers. Is there a successor within your firm? Will a family member inherit the business? Is training needed? Does buyer due diligence need to occur? Do you have a continuity partner in place in case of emergency?
- Think about your legacy—and your future. How will your colleagues and clients learn about your sale? What, if anything, will live on after you retire? Perhaps your brand name, for example? Also, how will you fill your time in retirement? Will any preparation be needed?
As you consider the multiple issues involved in selling your business, you might consult the following resources to stimulate your thinking: The Small Business Administration, an independent agency of the federal government that offers counsel and resources to protect the interests of small businesses; the Association of Small Business Development Centers (ASBDC), a network that helps new entrepreneurs realize their dream of business ownership and assists existing businesses to remain competitive in the global economy; and SCORE, a nonprofit association dedicated to entrepreneur education and the formation, growth, and success of small businesses nationwide.
With only 30 percent of businesses surviving through the transfer to the second generation, exit planning obviously must be improved. Especially in today’s uncertain market and increasingly crowded marketplace, there is no substitute for getting a head start on your exit plan. Please feel free to call me at any time to begin the conversation.