Besides death and taxes, there is one more certainty for business owners—they will exit their business someday. Whether it is because of an unsolicited offer they can’t refuse, a downturn that is difficult to overcome, a passionate plea by a family member to step in and take over, they just run out of gas and can’t do it anymore or they become disabled or die, everyone exits their business at some point.
The real question is whether the owner will be able to exit on their own terms in a way that is beneficial to them, those they care about, and the business.
It is possible to exit on one’s own terms, given the right plan and the right amount of time. To ensure a successful exit (one that accomplishes all goals, including financial security), small-business owners need to answer a number of critical questions:
• When and how do I plan to exit?
• How much money do I need, and where will it come from?
• What is driving the value in my business to make it attractive to someone else?
• What are my risks prior to exiting, and how will I minimize them?
• What do I want to do with the rest of my life (or, at least, what do I want to do next)?
Answering these questions (and many more) effectively involves developing a comprehensive exit plan and dedicating sufficient time to execute it. Exiting on your own terms usually takes at least three to five years. Often, most small-business owners severely underestimate the time it takes to do it right. And by underestimating, they run a great risk that one or more of their exit goals go unachieved, resulting in disappointment, frustration and, sometimes, an inability to exit.
When to Exit
“When and how do I plan to exit?” These are really two separate but related questions. Answering the first part of the question is the start of a successful exit planning process. It is also one of the most difficult questions for most business owners to answer. Many have dedicated their whole lives to building a business and it is an important part of their lives. It is an emotional issue, but it needs to be addressed first in order to plan properly.
Most small-business owners usually answer the timing question by saying, “Sometime in the next five years.”
Unfortunately, what they usually mean is, “When you ask me again in two years, it will still be ‘Sometime in the next five years.’”
The time frame continues to roll over and over again—the “rolling five-year exit.” Business owners cannot possibly plan effectively if they don’t have a real target date. Pick an exit date early in the process because it gives more time and more options to achieve stated goals. One can’t really get to the second part, how to exit, until there is a target date.
Timing may be part of the decision-making process on how to exit. Exiting does not mean retiring unless that is one of the owner’s goals. The exit date can change based on what the owner learns along the way, but it is important to start with some date in mind.
How to Exit
With the date selected, the next question is “How will I exit?” It is important to select a target strategy early for three reasons:
• There are 20 major checkpoints in an effective exit plan (some specific to the owner, some to the business). Selecting a target strategy will help prioritize which of these checkpoints are most important to address and in what order.
• Each checkpoint has a number of specific tactics that can be used to improve the ability to exit.
• Each strategy has different issues and risks associated with it.
Just like the exit date, the exit strategy can change, if necessary, as more is learned.
There are four major exit strategies for a small-business owner to consider, each with its own advantages and risks:
• Pass to a family member.
• Sell to an outside buyer.
• Sell to an inside buyer.
• Shut down the business in a planned way.
As business owners decide which of these strategies is the best fit for their exit and goals, several key questions will assist in reaching this conclusion.
Pass to a Family Member (“Passer”)
• Does a family member want to own the business?
• Is a family member capable of being an owner (with some coaching)?
• Will other family members be OK with passing ownership?
• How can the family member take over the business in a tax-effective way for all?
Sell to an Outside Buyer (“Outie”)
• Is the transferable value clearly above book value, and what would be most attractive to an outsider?
• Can the owner easily get a new buyer up to speed on the business and its operations?
• Will key employees be at risk after a sale?
• Is there a believable growth plan that will be attractive to a potential buyer?
Sell to an Inside Buyer (“Innie”)
• Are trusted employees capable of being owners, and do they fully understand the risks?
• How will the trusted employees finance the deal?
• Will the owner need to depend on income from the company as part of the sale, and how confident are they that they will continue to receive it?
• Can this transfer of ownership be accomplished in a tax-efficient way acceptable to all parties?
Shut Down the Business in a Planned Way (“Squeezer”)
• Is the owner the primary value of the business?
• Is there transferable value in the business that would be attractive to someone?
• Are any family members interested in learning the business?
• Are any outside buyers or inside buyers interested in sustaining or growing the business?
When and how an owner exits are just the start of effective exit planning. But they are important questions to answer right up front. When done properly, exit planning grows the business and prepares the owner for life after exit—on their own terms.
Ron Porter is a certified exit planning strategist with NAVIX Consultants. He can be reached at rporter@navixconsultants.com or 603-812-7066.
Current Issue - April 2024