Create a Winning Exit Plan
Eventually, you will leave your business. The manner in which you do so is up to you. Without careful planning, you will most likely be forced to liquidate. However, a carefully thought out Exit Plan enables you to sell your business to a third party, to key employees or coworkers, or to family members at a minimal tax rate.
Most owners measure their satisfaction with their business in terms of the income, wealth, identity and satisfaction it provides to them. Consider the rewards your business will bestow when you leave it as another definition of success. In order to leave your business under favorable conditions, you must create an Exit Plan as early as possible and stick to it as long as you maintain your business.
Choosing your business successor is fundamental to your Exit Plan. It involves a careful assessment of what you want from the sale of your business and who can best give it to you. There are only four ways to leave your business. If you know these methods and decide in advance which one you prefer, you increase your chances of leaving the business under the terms and conditions you desire.
1. Transfer of Ownership to Your Children
50% of typical business owners want to transfer their business to their children. However, fewer than one in three of these owners end up doing so. Because this is the riskiest way to leave your business, you must be prepared by developing a contingency plan to convey your business to another type of buyer.
Keeping a business in the family fulfills the personal goals of many business owners. It can provide financial well-being for younger family members, as well as allow you to actively stay involved in the business with your children until you decide your departure date. Transferring your business to your children also affords you the luxury of selling the business for what you need to live on. However, family dynamics can also play a negative role in transferring your business to a family member.
2. Sale to Other Owners or Employees
One of the advantages of having other owners in your business is that they can be your means to retirement. A common retirement technique, especially amongst smaller businesses, is to have a younger individual buy into your business while you are still active. The younger owner then purchases your remaining stock upon retirement.
This plan can be advantageous because the younger person learns the business under your tutelage. However, this plan provides no cash up front, unless you have personally pre-funded the sale, but even then, the pre-funded money was probably yours anyway. Another risk is that the buyout money comes from the future earnings of the business after you leave it.
3. Sell to a Third Party
In a retirement situation, a sale to a third party too often becomes a bargain sale – the only alternative to liquidation. However, if the business is well prepared for sale this may be your best way to cash out.
Although many owners don’t realize it, you should get all or most of your money from your business at closing. Therefore, the fundamental advantage of a third party sale is immediate cash or at least a substantial up front portion of the selling price. However, your risk becomes immense if you do not receive the bulk of the purchase price in cash at closing.
4. Liquidate It.
If there is no one to buy your business, then you shut it down. In a liquidation the owner sells off their assets, collects outstanding accounts receivable, pays off their bills and keeps what’s left, if anything, for themselves.
The primary reason liquidation is considered is that a business lacks sufficient income-producing capacity apart from the owner’s direct efforts and the value of the assets. Service businesses in particular are thought to have little value when the owner leaves the business. Because of this, liquidation produces the smallest return for the owner’s lifelong commitment to the business. Smart owners guard against this by planning ahead to avoid liquidation.
If you have any questions or concerns in regards to successfully selling and exiting your business, contact us today.