by Kelly Deis of SoundPoint Consulting
Most business owners transition out of a business only once in their lifetime. Few have been so lucky (and talented) to have built and exited from more than one company. And, for the majority of owners 80% or more of their net worth is tied up in the business.
It makes sense that a business transition should be one of the more thoughtful and deliberate decisions of a business owners’ working life. After a transition is complete, an owner does not want to be saying, “I wish I knew then what I know now.”!
The best way to accomplish a successful transition is to develop an exit strategy based on the owner’s personal and business goals and to commit the action items required to achieve the objectives to paper. This is known as an Exit Plan. And without it, the owner may not know what to expect, much less what is possible in a business transition.
A good exit plan not only sets business strategy and direction, but addresses personal, legal and tax issues as well. It provides a roadmap to reach the desired end-game. It is goal-focused, systematic, action-oriented, and:
- Articulates the owner’s goals
- Provides the value of the business today.
- Identifies strategies to increase the value of the business.
- Quantifies the owner’s retirement needs.
- Assesses various exit options.
- Estimates net proceeds after taxes and fees.
We have identified 5 reasons that we think every owner should have an exit plan.
1. Increases likelihood of achieving business and personal goals.
One of the most important outcomes of an exit plan is that it articulates and aligns both business and personal goals and objectives.
The classic example is the business owner who wants to cash-out and transfer the business to their cash-strapped child who needs the parent-owner to finance the purchase. These are two contradictory goals. Wouldn’t it be best to resolve these issues before you are too far down the path of a transfer?
2. Maximizes the value of the business.
As part of the process, you will want to have your business valued. This will establish a baseline valuation and an estimate of proceeds if you were to sell today.
Comparing this to your personal financial needs defines the gap in valuation needed to meet your goals. With enough time and a well-conceived plan, you can increase the value of your business, thus increasing your potential net proceeds.
3. Gives you control of how and when you exit.
Once your business is well-prepared for sale, you are in better control of when and how you transition. Simply, the more prepared you and your business are, the more attractive your business will be in the marketplace and the more options will be available to you.
You certainly don’t want to reactively sell an ill-prepared business under sub-optimal conditions, such as burn-out or health-related issues.
4. Reduces uncertainty for your family and employees.
Is the future of your business the proverbial elephant in the room? Perhaps one of your employees wants to buy you out, but you haven’t talked specifics with him. Or, your spouse wants to move closer to the grandkids – yet you cannot leave the business and there is no time horizon for a transition.
Employee retention and familial stress can be mitigated once the plans and intention for you and your business are well defined and communicated.
5. Minimizes taxes.
What matters most is the net cash proceeds to you. So, not only do you want to maximize the value of your business, but you also want to minimize both personal and business taxes.
You need a comprehensive tax strategy which will minimize capital gains tax, possibly defer tax payments and ensure the lowest possible tax rate. This cannot happen overnight, but will require proactive planning with a tax specialist.