For most business owners, their business is their single largest asset.
But when it comes time to put down the torch and exit the business, many don’t have an exit strategy. Whether this means selling to a third-party, passing the business on to family members or if an unexpected opportunity to sell or merge comes along, there are a few things you should check off before making your exit.
Ensure the Business Can Run Effectively Without You
It’s important to ensure sure the business can run without you in control on a day-to-day basis. Are all business operational processes up-to-date and are there capable managers to run them? Are all client relationships dependent upon you? Is there a management succession plan in place, whether this involves family members or other employees?
Especially if the goal is to sell the business to a third-party, the next owners want a going concern, not an extension of the owner.
Getting the Business Ready for a Potential Sale or Transfer to Family Members
Your company should be prepared for a sale or a transfer to members of your family well before the transaction occurs. This often means you, as the owner, must step back and look at the company the way an outsider would.
It’s important to get an independent, outside valuation for the business. An accurate valuation is crucial if for no other reason than to get an idea of what the business might be worth to a buyer. It can also play a key role if the business is transferred within the family in terms of any gifting and related tax issues.
Owners should ensure the legal structure of the business entity is the appropriate one for the business and that all legal issues are resolved prior to planning their exit.
It’s important to ensure all financial statements and financial filings are up-to-date and that the business has the right internal accounting system with a solid external CPA in place. External buyers do not want to be hit with a financial surprise, this is also another step in getting the business to a point where it runs like a true going concern independent of the owner.
Assess customer relationships and the likelihood of retention after you depart. Are there customer agreements in place? Are the customers tied to you or are they used to dealing with other members of your company or is the relationship solely dependent upon you?
In the case of a transfer within the family, are the family member(s) who have been designated to run the business ready to so? Are they qualified, and do they want to run the business? While these might seem like easy questions with obvious answers, they often are anything but simple. For example, children may not want to disappoint their parents by not taking over the family business that they built, but the reality is their heart may not be in it, which could cause problems down the road.
It is also important to do proper income tax and estate planning to minimize the tax hit from the transfer. In addition, the owner will need to have a plan to realize value from the business. This could be some sort of payment over time to some other formula. The owner’s financial needs will need to be balanced against the cash flow needs of the business.
Is the Owner Ready to Step Away?
This question is both a financial and personal one. Are you financially prepared? Will the sale or transfer of the business provide the cash flow needed to fund your retirement? Do you have a retirement plan or other assets in place to draw upon?
If your company already has a 401(k) or similar plan in place be sure you are maxing it out while you are still working. Depending upon your age and the mix of employees or partners you might be able to structure a plan that allows out-sized contributions during your last few years before exiting, allowing you to build up assets at a faster rate if you are behind in your retirement savings.
The personal side is equally important. What will you with yourself the day the deal closes? It’s important for you to have a plan for how you will spend their time in retirement or after exiting the business.
For many business owners, their business is their largest financial asset and a major part of their lives. Planning your exit from both a financial and emotional standpoint is critical to your personal success and happiness in the next phase of your life.