All owners WILL one day exit their business. Whether it is through sale, transfer to family members, bankruptcy, disability or even death. It is inevitable. Yet, many don’t plan for it in advanced – have you thought about the impact of exiting on your lifestyle, your family, company employees and even the customers? Does it matter to you HOW you exit? Or HOW MUCH you get?
Even if you don’t know when you want to retire, now is the time to plan your exit and give yourself some peace of mind. Those that plan ahead are more likely to be led through a satisfying, rewarding experience that better sets themselves and/or their families up for the future. Not planning ahead could mean business liquidation that merely pays off company debt, wiping out the value you’ve painstakingly built through reputation, your customer list and other business relationships. If you want to begin exit planning, here are five steps to get you started:
- Set your personal and business goals. What are your goals personally and professionally? As a business owner, your personal goals most likely rely directly on your business achievements – and therefore your business goals. Review what it is you hope to glean from the business and what you picture for yourself personally, especially the lifestyle you want to sustain when you exit the business.
- Establish the current value of your business. Do you know how much your business is worth? This is important to planning your exit because the value of your company may be a large part of what helps you reach your personal goals. Don’t stop at finding out your number, it is important to understand what facets of your business are driving company value. If you’d like, you can contact us for a free business valuation.
- Determine how to build and protecting value. As mentioned above, it isn’t enough to just know your business value, you must understand what drivers are behind it. Value drivers are key factors behind business valuations, specific internal and external characteristics that affect the buyer’s perception of value. You can check out 5 Key Value Drivers here. By determining the value drivers that need to be maintained or improved, you can prioritize your business objectives and update your business goals with specific and measurable actions.
- Create your succession plan. A succession plan is a plan of action to educate, train and develop your management team or at least a second in command. This may include additional hires to ensure you have a strong team in place or creating a specific development plan for a chosen successor. The goal is to ensure that the business can run seamlessly without you. To accomplish this, it is prudent to create and document very specific process and procedures to ensure knowledge is transferred for years to come. This supporting documentation will also be important to prospect buyers when the time comes to sell – or be critical if you unexpectedly can no longer work.
- Choose the sale type and confirm your vision of life after the sale. This is the “how” of your exit strategy. Common exit strategies include:
- Strategic Acquisition – another company purchases your business. This could be a company within your industry, a related industry, or a private equity group who can leverage your company’s competencies and resources with another company or platform of companies. For this exit type, it is a good idea to work with a business broker to ensure you get the best price.
- Management Buyout or Friendly Buyer – a member or multiple members of management take over and purchase the company. This is common in cases where the family business is being handed down to the next generation.
- A Recapitalization – Private Equity Groups often prefer the owner to stay on through a recapitalization. They usually buy a majority stake in the firm (51% to 70%) and invest capital to build the business with the intent to sell the business at a much higher price 5 to 10 years later. If you’re time horizon works, then this is an excellent way to get some liquidity and partner with a group that is aligned with an exit strategy where everyone benefits.
Based upon your exit strategy and current business value, you can better project how much you may actually get upon an exit. Consider potential related fees and taxes. Finally, review and compare your lifestyle goals with your business goals, particularly in relation to building and protecting value, and your estimated cash out upon exit. Make sure these components are in sync and ensure you understand what the biggest drivers of value are for your company.