You’ve heard it said: “The only sure things in life are death and taxes.” A truthful addendum to this for the private business owner that is equally sure is that at some point you will beyour business. No matter how much you love your business; there will come a time when the time will come. Some business owners will retire as they’ve always envisioned, while others will be forced to accelerate retirement due to unforeseen medical issues. Some business owners will notice changes in the market or industry that will begin to take their toll while some will pass the business along to a family member or a loved one as planned. No matter the specific circumstance that will motivate the , the business owner must be ready when the time comes. In the same manner that you keep your receipts when preparing to file for taxes, you must also prepare in advance for your business.
Unlike selling a home, the 12-18 month process for selling a business has to start with the valuation process. One of the key takeaways a business owner will get from the valuation process is that their revenue and business model might not be what buyers are looking for. To attract a serious buyer it might take a year or more to grow revenues, transition revenues into strategic forms, or other strategies to successfully complete an exit plan. For example, a multi-city Air Conditioning Repair company might be doing $5 million in revenues. However, more attractive than $5M in revenue that is derived from residential customers who call when something breaks is $5M in revenue which 20% is based upon commercial contracts, 30% is based on residential maintenance plans, and the remaining 50% is based on new business which is derived from a variety of cost effectivewhich includes Internet marketing, etc. See the difference? One offers great value where another offers great value with strategic diversity.
- Define Post-Business Objective – The first step of exit planning is the definition of your objective. What are your plans once your business has sold? This objective will drive the exit planning process. Â The owner will need to decide how much profit he or she needs to make out of the sale of the business in order to achieve an ideal outcome.
- Financial Planning – Once you have determined your primary objective, you are ready to begin to prepare the financials for the future sale. During this portion, the owner and professional advisors will begin to look at the cash flow and profitability of the business. The current value of the business will be assessed including all assets. Once the financials of the business have been assessed, there will be a thorough review conducted of the business, and of its value drivers.
- Management Transition – Whether or not you are planning to sell to a third party or to an insider will determine how you manage the transition in your exit planning process. Is it transferred to a third party or to an insider? This will determine how to plan for their exit. Often times if an owner is planning to sell to an insider who may not have sufficient personal capital, the owner may need to have an alternate plan in order to still receive maximum value at closing.
- Contingency Plan – With every good exit plan, there needs to be a well thought out contingency plan. Â Risks must be assessed. Some risks include: potential litigation, large portions of revenue in the hands of a few clients, liabilities, employee risks and others.
- Personal Estate Planning – The final stage of an exit planning process is your personal estate planning. Certainly not the most exciting portion of the process, but critical to a successful plan is planning where your money and assets will go if something were to happen and you were to pass away earlier than expected. SmartMoney offers helpful solutions for personal estate planning.