What Every Business Owner Needs to Think About
Written By: Karin Foster, Treveri Law, PC based on “Preparing for Transition” an article by Richard Jackim President of The Exit Planning Institute
For every business owner, there comes the day when they will no longer own their business. Ben Franklin wrote "Nothing is certain but death and taxes," and he was right. Planning your exit from your business will allow you to leave at the best time for you, your family and your investors.
What is an exit from a business? It can be an emotionally charged sale to a third party, a long and satisfying transfer to the next generation, a sale to make your employees owners or a quiet closing with all debts paid. You may get an offer that you can't refuse and be set up for life or your next business. You can plan to sell at a good time; take the money
and run. Or it could be a forced sale due to a divorce, disability, death, distress or disagreement with a spouse or business partner. An exit plan is simply good business strategy that will result in being ready to take advantage of good opportunities. You will exit when you are personally and financially ready while your business is attractive and ready for a transfer.
To develop an exit plan requires a bit of work, introspection and discipline. Questions need to be answered such as: What is your business worth? What do you want it to be worth? How do potential buyers value your business? Is it possible over a short timeframe to increase business value and therefore sales price? Is it best to always take the highest offer? How would you value the best offer for you, your family and the business? Your business plan is the blueprint, and your exit strategy guides you on when to harvest the fruit of your labors in the business.
A good exit plan also looks at the personal side of leaving your business – are you personally ready to exit? What will your identity be after a transfer? What does your spouse think about your exit from the business? How will their life change? Similarly, will you be ready for the inevitable change in financial circumstances when you leave your long-time money generator behind? Do you have other sources of income that may fill the gap needed to maintain your current standard of living? Will your children expect to run the business? Are they ready to run the business? Will there be hurt feelings between siblings not involved in the day-to-day operations of the business? With over 75% of business owners stating in the 2007 Business census that they ‘regretted’ exiting when they did, the family, personal and financial issues are just as important to address as increasing the value of the business.
What are typical exits for business owners? If everything goes well, a small business will provide a nice income for the owner and is then sold for a good price to a third party buyer, a strategic buyer, an involved and capable family member or manager or employees, or the company is liquidated and sold for its assets. In order to make a business more attractive for sale, along with creating a next-step path for business owners, an exit strategy will take several years of boosting income before speaking to a business broker or investment banker for the sale.
The end for many business owners can actually be their own "final exit." If it is unanticipated, a number of unpleasant things can happen to your business and your heirs. At the very least, no matter how young you are, you should know who is going to end up with the responsibility for running the business and who will get the benefit for owning it. Often these will be family members but they can be trusted associates or organizations that provide needed services. You can even set up your own family foundation and leave the business or its proceeds to support purposes that you have specifically chosen.
If you do intend to leave a profitable business to your heirs, rather than to a charity or foundation, it is a good idea to transfer ownership to them in an orderly way that will minimize your tax liabilities. At Treveri Law, PC we can help you with the contingency estate planning as well as help you get clarity to build an exit strategy that will provide structure for the growth of your business toward your eventual and successful exit.