Leave small business? You need a good exit strategy.

Baby Boomers own approximately 40% of privately owned small businesses and franchises in the country, and as they approach retirement over the next few years, they will need proper strategies to “get out” of their businesses, be it bequeathing them heirs or selling them to outsiders. .

Care planning is important for a variety of reasons, including understanding the total value and profitability of your own company, planning for the future of your business, and evaluating its impact on new owners, not to mention current employees.

“Exit planning is a premeditated strategy that business owners use to exit their private business when they are ready to move on to other opportunities, retire or become disabled,” explains Jeremiah Foster, president and founder of Resolute Commercial Services. , an independent consulting firm in Scottsdale, Arizona.

The people who own the business can exit or leave it in a number of ways, including selling, merging, or giving away; each option has its own set of costs and benefits. “A well-designed exit plan helps maximize business value, minimize the tax burden, and meet the owner’s personal and business goals,” Foster says.

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The Importance of Proper Exit Planning

Exit planning is especially important now because the country is on the cusp of an unprecedented transfer of wealth. According to Chuck Kanley, business succession strategist and M&A consultant at Premier Sales, a sales, M&A firm, boomers were the most prolific private company builders in the country’s history, and their members are now between 58 and 76 years old. in Phoenix.

“These businesses need to be taken over and handed over to a successor,” he says. “The problem is, after the baby boomers, the next two generations combined are smaller than the baby boomers.”

So what does it all mean? “There is less chance of a successful business transfer,” Kanley explains.

Foster agrees. “Exit planning gives you more control over what happens to your business and employees while maximizing your bottom line,” he says.

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Exit planning basics

David McCarville, director of national law firm Fennemore Craig, PC, says the success or failure of exit plans typically depends on owners understanding the true market value of their business, accurate accounting and tax records, and their contractual legal obligations. rights and obligations from any sale of your business.

“Understanding the market value of your business will require careful planning as you will need an objective view of the market value of your business,” he says. “This should include hiring a valuation expert who is familiar with your business and can identify specific factors for you that will make your business more or less valuable to potential buyers.”

You will need to back up your assessment with professional quality accounting records. “Dedicating time to review and organize your accounting records will allow potential buyers to complete their due diligence faster and save you time and money in the long run,” he adds.

Sellers should get everything in writing to prevent any misunderstanding later, McCarville adds. “Ultimately, an exit plan will require a contract that defines your rights and obligations in any sale of your business,” he explains. “Therefore, it is necessary to understand what options are available to you in terms of negotiating your rights and obligations under any sales contract.”

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What are your options?

Kanley says the most common exit plans follow one of the following paths:

  • The owner remains with the company as chairman of the board and delegates the day-to-day responsibility for running the business to the incumbent management team.

  • The owner cuts all ties with the company, transferring ownership and control to company insiders such as key employees, managers, or family members.

  • The owner leaves the company after selling it to a capable, unrelated third party who then creates their own management team.

Of course, there are other scenarios, including a merger with a similar business or a business going public by selling shares in an initial public offering, or IPO, Foster says.

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Which one is best for you?

To figure out which option is best for you, Foster recommends asking yourself the following questions:

  • Do I want to continue to be involved in the business to some extent after I retire or sell? “If the answer is yes, transferring your business to a family member or negotiating employee buyouts are options that will most likely allow you to remain a consultant in some capacity,” says Foster.

  • What are my financial goals? “Merger; selling your company to another business, partner or investor; or IPO are the options that can provide the most profit for your business,” he adds.

  • What do I want to happen to my employees and/or clients after I leave? “Transferring the business to a family member, negotiating an employee buyout, or selling to a partner or investor are options that are likely to have the least impact on employees,” he says.

  • How much debt does my business have? “If a company is heavily in debt, liquidation, ABC (assignment to creditors, less formal liquidation) or bankruptcy may make the most sense in your circumstances,” he explains.

When and where to find a professional

As with many business strategies, it’s best to plan your exit strategy long before you need to use it.

“Good planning takes resources,” says McCarville. “The sooner you start planning for care, the more likely you are to save time and money in the process.”

Financial experts recommend that small business owners hire an exit planner and set aside time to work with them.

According to Kanli, trust is a key element to look for when choosing a professional to help you prepare your plan.

To gain credibility, he recommends that you ask potential consultants to share their success stories, discuss some of their failures, and talk about whether or not you should expect a return on the fees you pay.

Experience and communication are important

“Past experience and good communication skills should be high on your list when evaluating exit planners,” whether they’re lawyers, valuators or accountants, McCarville adds. “Communication is difficult, and misunderstandings in care planning can lead to critical errors, wasted time, and lost value.”

In general, people with exit planning skills agree that it is best for owners to start working on an exit strategy now.

Kanley says many business owners refrain from talking candidly about exit planning, perhaps because it reminds them of their mortality or suggests they are no longer needed in the business. This is mistake.

“This conversation is important not only for the owner or founder,” he says, “but also for the employees and families that the business supports.”

Michelle Talsma Everson is a writer and editor based in Phoenix, Arizona. She has written for various media and believes in the power of storytelling to shed light on important topics that affect people’s lives. You can see her work on mteverson.com.

This article is reprinted with permission NextAvenue.org© Twin Cities Public Television, 2022. All rights reserved.

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