3 Tips for Small Business Owner Exit Planning
|In her professional lives across the United States, Natalia Autenrieth, CPA has audited Fortune 500 clients as part of a Big 4 team, built an accounting department as a controller of a large hospital, and served as a CPA consultant to municipalities. Today, Natalia coaches in the financial industry and writes about business finance, financial technology, and personal money management. Her ghost-written articles have appeared in thought leadership and expert blogs, as well as Kiplinger and Accounting Today. Read more about Natalia and her practice at www.AutenriethAdvantage.com.|
3 Tips for Small Business Owner Exit Planning
For many small business owners, their company is like their baby. Some days are tough, and yet most owners prefer not to think of stepping away from it. A recent survey from Nationwide indicates that three out of five small business owners don’t have a plan for when they are ready to retire. Some believe that advanced planning isn’t necessary, others don’t want to give up their life’s work or cannot carve out the time and effort required to design a transition plan ahead of time.
However, from the practical standpoint, the owner’s exit is an important issue to consider. With the business often representing the owner’s largest asset (and often the unofficial source of financial security in retirement), neglecting to plan for eventual transition is a mistake.
What are your options for exit?
A business owner has several choices when it comes to stepping out of a business.
The first, and one that many small business owners choose by virtue of inaction and lack of planning, is to continue to run the business until they cannot do it anymore. While the idea of being productive and busy until the very last days is appealing, the wish alone isn’t enough. Heart attacks, family health issues and accidents do happen, and business owners need a plan for what would happen to their business if they became temporarily or permanently unable to run it.
The second path is to close the business down when the owner no longer wishes to be involved. This scenario may be easiest to execute, but it rarely maximizes the value of the business built over the years. Of course, inventory and equipment could be sold off to raise some money, but the amount would be far below what an active and thriving enterprise could potentially bring in.
The next choice is to sell your business to a third party. This is a market transaction that involves establishing the fair value of the business, searching for a buyer, and negotiating the terms of the deal.
Finally, there is the possibility of a transition to an internal successor (family member or business partner). Because this transition takes place on special terms, and because the successor has often contributed to the growth of the business, the price may not be as high as in a third-party transaction (although specifics will vary).
Your most important asset? Time!
Selling a business takes longer than you might think. Depending on the path, business owners must begin to lay down the groundwork years before they plan to step out of the business. Here are some important considerations to remember.
In a sale to an independent third party, valuations, market conditions, and the health of the business will drive the price. Depending on the nature and size of your business, locating the right-fit buyer with available funding may be a challenge. Preparing a business for the eventual sale is similar to preparing a house for a listing on the market. Expect prospective buyers to look closely and scrutinize every detail. If you hope to maximize the financial value of the sale transaction, out yourself into the buyer’s shoes and make your strategic decisions accordingly.
Selling to an internal successor, while simpler is some ways, still takes years of planning. The owner must be patient in finding the person with the right ambition, skillset, and financial resources. Sometimes, the search and trial process must be repeated as people’s circumstances change and partnerships that once looked promising fall apart.
Exit planning for small business owners
Succession planning for small business owners takes time and soul-searching. For best results, begin planning now. If you hope to sell the business in the future, build workflows that aren’t fully dependent on you being there to handle the daily aspects of running the company. Talk to a financial planner about your strategic choice of investing extra profits back into the business versus taking distributions and tucking that money into your savings. Business owners who begin with the end goal in mind have the best chance of a smooth, planned, strategic exit.
Linking back to statistics: https://www.nationwide.com/family-business-planning-and-succession.jsp