By Michelle Eldridge, originally featured in SBAM’s FOCUS magazine
It’s pretty common knowledge that when thinking of starting a business, you should spend the time to create a thoughtful, written business plan. This plan not only serves to communicate your vision to your investors, bankers and perhaps customers, but it also serves as your road map as you turn your
vision into a viable business.
Not as common, but I’d argue equally as important, is the Business Exit Plan. This plan is also a written document that is thoughtfully created and designed to be a road map—however, in this instance, a road map that will guide you in likely the most important financial transaction of your life: a successful transition of your business.
Unless you hope to work until your last day on this earth, you will exit your business at some point; it’s just a matter of whether you’ll exit vertically or horizontally. Too many business owners fail to plan for this important event and then their ultimate exit is less than ideal. If you take the time to plan, you’ll have much more control over the outcome. And every business owner’s idea of a successful exit is different.
Do you want top dollar in a sale? Do you want to make sure your employees remain employed with the company? Do you want to sell to the next generation or your experienced management team? Are you alright with a sale to a competitor? Answering these questions is an integral part of the exit planning process.
Equally important is asking yourself how much you will need the sales price to be to live the life you desire post exit. What is the most tax efficient way to transfer the business? How much risk are you willing to take to capture the full value of a sale in any transaction that isn’t all cash up front?
And, finally, the biggest question—how much is your business worth? You must note that most business owners have a higher value in mind than what is truly reasonable. It is better to find this out earlier than later so you have time to make the changes necessary to increase the valuation.
The exit planning process will guide you through all of these questions and more. The key is to not be alone in developing the answers (and therefore the subsequent plan), so please look to and engage your professional team of advisors to be involved in this process.
While you will be the most important spoke of the wheel, it is important that you include your CPA/Valuation expert to help determine your business’ current worth; your financial advisor to determine the amount you need the sales price to be; your business attorney to advise on optimal structure for the sale; and, potentially, a business consultant to help you close the gap between current valuation and the valuation you need to live your best post-exit life.
While you can certainly quarterback this process, you may elect to hire a qualified Business Exit Planner to guide the whole process and keep everyone on track, engaging with you and reporting to you along the way. The cost of hiring this expert may pay spades at sale time. But regardless of whether you hire an expert or do this on your own, make sure it is a written plan with an action checklist. Assign responsibilities to each of your professional advisors with deadlines, and then be sure to check in with your plan on a regular basis to ensure you remain on track.
All of this is why you want to start early, well ahead of when you want to actually leave your business. Give yourself time to construct the plan, determine the current value and work to improve the value to the level needed. Often this means making yourself irrelevant to the business, which can be a hard step for the founder. But a business will have more value to a buyer if the value of the business is not based on the founder’s day-to-day immersion in the business. This might mean honing the management team, transferring the leadership responsibility and taking long vacations to test the competency of the team.
You’ll also want to systemize and document your processes, tighten up your expenses, put a shine on your facilities, and most essential—ensure your key employees are motivated and committed to the business.
So when should you embark on this exit planning process? Officially, a wise choice is to start around five years before you actually plan to retire. However, if you plan to retire next year, still construct a plan. If you plan to retire in 10 years, start thinking about it now. I like to think of it as similar to selling a house—don’t wait until right before you sell to spiff things up or you’ll never get to enjoy all of those improvements you made for the sale. The same goes for your business.
Michelle Eldridge, CFA, CPWA® is co-founder of Clear Ridge Wealth Management in Kalamazoo where she provides wealth management services to entrepreneurs and their families.