Do You Have an Exit Strategy?
One of the greatest bounties of being the boss is the option to keep your firm running for as long as you like — until you're ready to move on to your next chapter. Yet, the Harvard Business Review recently reported that 70% of respondents to a survey of small business owners had spent little to no time on creating an exit strategy.
The mission of a well-structured business exit strategy is simple: It ensures that you and any other stakeholders can exit the business and get your investment back, along with any profits accrued during your tenure.
A thoughtful exit strategy not only makes the transition easier when the time comes, but helps you guide business decisions from now until the time you leave. And perhaps most important, a comprehensive plan will outline how the proceeds of a sale can, along with other resources, provide for a stress-free retirement.
Consider these eight steps to getting started on the right track with a business exit plan:
1. Create a post-ownership vision.
The best plan provides for the next chapter, whether that means retirement, starting another business, or maybe even working for someone else. Do your best to turn that fuzzy vision of Chapter 2 into a clear plan. After all, starting a new business, working part time, or retiring all require different resources. Don't box yourself in.
2. Consider your succession plan.
Do you want to pass down your business within your family, transfer ownership to key employees, or sell the company to an outside buyer? This will be the basis of your succession plan — a blueprint for the seamless transition of ownership. Seek the wisdom of a financial planner and an attorney with experience in contracts, tax laws, and other regulations.
Specifically, strategies often have significant tax implications, so it's vital to work with a tax professional to minimize your tax liabilities.
3. Determine your firm's market value.
Understanding your business's current value will ensure that you're prepared for any offer that comes along — expected or unexpected. By hiring a business appraiser, you can get an objective and formal valuation. Look for one that adheres to the Uniform Standards of Appraisal Practice (USAP), the appraisal industry's gold standard and a requirement for all state-licensed appraisers.
Most business valuations are good for at least a year, according to the National Business Valuation Group, provided all variables remain the same. However, as your business expands and conditions change in your industry and the local economy, you'll want to update your appraisal.
60% of business owners say they're "quite unprepared" to respond to a purchase offer.
Source: Harvard Business Review
4. Compile a financial profile of your firm.
In addition to conducting an appraisal, keeping your financial records in impeccable order will make your business attractive to potential buyers or successors. These documents include up-to-date financial statements, tax returns, and a clear record of assets and liabilities. Organized financials can also simplify the due diligence process for prospective buyers.
5. Set milestones.
As you develop your exit strategy, identify ways to increase the value of your business between now and your projected sale date, setting milestones and deadlines to keep you on track and accountable. Milestones may include increasing your profit margin by a given percentage, introducing new products and services, or growing your management team. In any case, make sure they're realistic and well-documented.
6. Create an exit timeline.
Having an idea of when you want to exit your business will help you prepare for the transition. As you near your target date, you'll want to make sure you're out of debt and not taking on new investors. In addition, you'll need to evaluate the prevailing market environment, since factoring current conditions into your exit strategy may help you gain a higher return.
7. Update your exit strategy regularly.
In addition, be sure to update your exit strategy at least once a year to ensure that it's aligned with your long-term objectives. Your exit plan may evolve along with your personal circumstances, business goals, and market conditions. So be sure to stay open-minded and not set on one approach.
8. Be transparent about your plan.
You want to keep things running smoothly before and during your transition. With that in mind, be as transparent as is appropriate with your team, your customers, and investors.
Once you have an exit strategy in place, you'll find that everything you do for your business carries a greater sense of purpose and value.
Did You Know?
14 percent of self-employed Americans are 67 years old or older, a 5% increase since 2013.
Source: Federal Reserve of Minneapolis
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