Exit planning is a vital part of the lifecycle of a business. It seems simple at first: how do you plan to exit your business? But the options, and compliance factors, that go into exit planning can leave your mind reeling. That’s why it’s best to plan early.
Not sure where to get started? Here are seven key questions to ask yourself as you begin to exit plan.
- How much longer do I plan to work/stay involved in the business?
It shouldn’t come as a surprise that you can’t just wake up one day and decide to sell your business—if you want to do it responsibly and profitably, that is. It usually takes a few years to develop an exit strategy. Ideally, an exit strategy will be part of the original business plan, keeping in mind that strategy may change over time. If you own a business and would like to retire, sell your business, walk away from day-to-day operations, or pass the business down to the next generation, start the planning process now. Ideally, there will be at least three to five years before a sale.
Dive Deeper: Is it time to join the sell party?
- How much control do I want after my exit?
Over 90% of business owners agree or strongly agree that a transition strategy is important, according to the Twin Cities chapter of the Exit Planning Institute of Owner Readiness. Yet in the same study, 26% of owners said they had no transition plan.
Having a better understanding of what you want will help you when it comes to articulating this to fellow stakeholders. If others don’t know they are part of a plan, they’ll make their own plan. These conversations will also better prepare you to work with exit strategy advisors.
Dive Deeper: Buy/Sell Considerations
- How do I plan to replace myself?
Many small business owners will say, “I do everything. I’m indispensable.” What they’re also saying is, “My company isn’t worth very much in a sale.”
When it is time to transition your business, you ideally get paid for what you have built. This assumes that you are not the glue that holds everything together. Success should be measured not by the time you spend in the office, but the time you spend away from the office. The real value is in the team you have built. It's created when you can exhibit a refined set of processes and systems that capture and report the information needed so you can manage the business, but not also have to serve as the janitor, IT support person and the top revenue generator.
This is another reason why preparing for an exit can take years. If the business can’t function without you, you must find a way to transfer or replace what you do. You also have to consider what types of sale options will allow you to continue the legacy you have built.
Dive Deeper: Exit Strategy: Transitioning Your Business to a New Owner
- Are my records ready?
If you want to get the full asking price for your business, your records need to be clean and organized so a third party can go through them with a fine-tooth comb. Otherwise, how can you prove the business is as valuable as the asking price?
There are several steps to consider when it comes to preparing your financial records, and your business, for sale. A key component is quality of earnings due diligence, which analyzes your organization’s financial information. This process is completed by a third party because it helps you substantiate the cash flow and ultimately the value your business. The diligence phase either builds or erodes confidence, so this process is preparation for challenges that may arise.
Dive Deeper: Understanding quality of Earnings When Selling a Business
- Do I know what my business is 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–not what you think it’s worth. Market value always trumps what you “need” out of the business.
Use independent expertise to value the business before you get locked in during a negotiation. These professionals can often show you some strategic changes to make now to increase market value in your favor, which in turn will increase your leverage with potential buyers.
Dive Deeper: The Importance of Valuation
- What am I doing now to maximize my future after tax dollars?
Don’t look at taxation in isolation. Revisit your business plan now and consider the tax implications for every investment, your projected growth and even your own compensation package. 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.
Dive Deeper: Estate Planning is More than Just Tax Planning
- What is your next great adventure after you leave your business?
Now is the time to get creative and imagine a new life for yourself. Have fun dreaming. The possibilities are endless. But remember, plans evolve. So, revisit your answers to the first six questions and verify they align with this next great adventure.
Ready to get started on your exit planning strategy? We have tips and tricks to ensure you get going on the right foot.