Most business owners will see the title of this article and skip the whole thing. After all, they’re too young and too busy in the business. Why should they start planning their exit strategy now?
You’re not one of them. That means your eyes have been opened to the imperative, of thinking about your exit from the outset – or at least from today forward.
You realize that you have no intention of working this hard for another 5, 10 or 20 years. You’ve built a business you are proud of, that rewards you nicely today and you want to be able to walk away on your terms on your timeline.
Sounds simple and reasonable. But for many logistical, emotional, and financial reasons, it can’t happen overnight. Unfortunately, most business owners neglect the topic, don’t consider the decisions, and leave the process to the last moment. Unlike their decisive leadership that got them to this point, they’ve sidestepped the following questions for various reasons. You don’t have to.
Here are five key questions you do want to spend time considering, and exploring the tradeoffs of different answers. Sometimes the answer to one, dictates the answer to others, but if that one answer changes, you open up other latent possibilities you’d never thought of before. When you lay out your answers to these questions, you will be in a better position to take timely steps and integrate all the necessary elements for your exit. You will be in control of effectively negotiating a successful business transaction to achieve your optimum exit.
1. How much longer do you want to be actively involved in the business?
Vague answers like ‘at least 5 more years’ are a way to avoid the question. Dig deeper. Maybe it’s easier to look at what you want to accomplish in the business before you’re ready to walk away. This date is important because it triggers every other action, trigger and date along the way to get there.
Most successful exit transactions take long-term strategic planning. They can’t and don’t come together in 60 days. You must start the process before you ever thought it would be necessary because it takes far more time than you imagined to line up all facets to suit you.
To maximize the value of your business when you do exit, you need to have a clear goal for the company and for your own/your family’s future.
2. Who will be your likely successor?
Have you thought about who should be your successor? Should it be your children, one of your children? Should it be your employees? Or would you look for a buyer well-suited to the business, who can take it to new heights? Maybe you think it’s in your customers and staff’s best interest to be acquired by an industry giant or your biggest competitor?
There are many options. What’s optimal depends on you, your goals, your industry, your company culture.
3. What do you need out of a transaction or transition to have the financial independence for your next venture/adventure/retirement?
This is really two questions and to answer the first half, you need to answer the second half first.
What will you do next? Do you have a plan? Do you have a project, venture, hobby in mind? Will you travel for 2 years and then build a house up in the mountains? Will you go back to school as a student or professor? Will you volunteer?
Your plans for your next steps or avocation create the baseline of your financial requirements from any transition or transaction you decide on. Think through your aspirations for the lifestyle you want and the goals on your bucket list you want to fulfill once you exit this business. Clarify what you’ll be doing and what it will take to fund your financial independence. That will set some parameters on your company valuation and the structure of your exit to ensure your future.
Run the numbers so you know how much you need from the deal so you know with relative certainty that you can pursue and achieve your life’s goals. That has to include basic living expenses, health care costs, long term care costs; and any education funding for children or grandchildren, travel costs, replacement vehicles, vacation home, weddings, philanthropy, legacy planning, or tax liabilities.
4. Do you know what your business is really worth on the market?
You need two numbers. In the end it’s up to you to make sure they match.
You need to know how much cash you need to take away from the sale of your business, regardless of the form the transaction takes. And you need to know with brutal honesty the market value of your business – what it is actually worth, not what you think it’s worth.
Market value always trumps what you ‘need’ out of the business. Don’t get trapped into terms you don’t like because you were only looking at the valuation number. Use independent experts to value the business before you get locked in during a negotiation. They can often show you some strategic changes to increase market value in your favor.
5. What should you be doing now to minimize your future tax liabilities?
Don’t look at taxation in isolation. Revisit your business plan now and consider the tax implications for your growth curve. Expand your strategic planning to include contingency planning, succession planning, transition planning, and then run some financial models to see which options look most attractive for your future.
Whether you intend to sell your business in the next couple years, or you’ve set a date 5-10 years from now, it’s never too early to start the planning process. Planning now will help you clarify your ultimate goals you are aiming for. The business will be the vehicle or the source of funding to provide the financial freedom so you can achieve every goal you set.