Business Exit Strategies: Setting the Stage for a Successful Transition
It’s inevitable. Sooner or later, you will part ways with this business. The one you’ve poured your heart and soul into — maybe even built from the ground up.
When looking ahead to what’s next, you might have more questions than answers. What’s the best business exit strategy? Who will take over all your day-to-day responsibilities? If there’s no successor waiting in the wings, who will buy the business, and how much is it worth to them?
Owners of small and mid-sized closely held businesses often have a number of options for transitioning out of the business. But before making decisions about how to exit your business, it’s important to take a step back and get clear on your ultimate goals.
Should I Stay or Should I Go?
When you turn over the reins to a new owner or owners, do you want to stay involved in the operations? If so, for how long? What about your financial stake in the business? Do you want to cash out immediately or maintain some equity for a period of time?
Keep in mind that an outside buyer who doesn’t already have expertise in running a business like yours will likely need you to stick around for a year or two after the sale. And that might be something you want, especially if you have long-standing connections with your employees. After all, it’s natural to feel an emotional investment in what happens to the business after you exit.
On the other hand, you might be looking for a more cut-and-dried separation from the business. The business exit strategy for an owner who wants to sail off into the sunset immediately after the transaction will be vastly different from the strategy for someone who wants to keep a stake in the business for a few years.
3 Factors that Impact Your Business Exit Strategy
Once you’re clear on what you want for the business and for you, it’s time to sharpen your pencil on a few important numbers that will help you achieve your goals.
- How much will you need to net from this transaction to fund a secure retirement? Meet with your tax and investment advisors to run projections of the level of assets you’ll need for a secure retirement, as well as how to manage your tax liability.
- What’s the business worth? A professional valuation of your business is a smart investment for a number of reasons. Perhaps most important, it will give you an idea of how the sale of your most significant asset would contribute to your retirement target. Another advantage of a proactive business valuation is that you will be prepared if someone approaches you out of the blue with an offer to buy the company. Anyone who has received one of these unsolicited offers knows that it’s an unsettling feeling to not know whether or not an offer is a good one.
- When do you plan to exit? If you’ve answered the previous two questions, you’ll have a much more realistic sense of when you will be able to transition away from the daily demands of running a business and fund the retirement you want. If there’s a significant gap between your personal financial target and the current business valuation, it might be wise to spend a few years building up the value of the business.
Get Ready to Cash Out: How Smart Preparation Leads to Top Dollar
Proper planning and preparation will allow you to make operational changes that will strengthen the business’s financial standing going forward and net the strongest purchase price. Some of these changes might involve reducing excess expenses, adding key employees or consultants, or implementing price increases where warranted.
These changes take time–anywhere from a few quarters to a few years–to filter through the organization. That’s one reason why you should put in place a business exit strategy at least three to five years before you want to transition out of the business. Business valuations look back to a minimum of three prior years of financials. Even if your plan needs to adapt to unexpected changes down the road, you’ll have the confidence of having a strategic framework in place that enables you to make informed decisions.
When you’re ready to start crafting your business exit strategy, contact your Copeland Buhl advisors. With a clear set of goals and careful planning, you can transition from managing a business to dedicating your attention to ensuring that the next chapter of your life is truly fulfilling.