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Developing an Exit Strategy

By Toolkit Staff | July 03, 2012

If you've been at all successful in your business, you've most likely put tremendous amounts of time, energy and plain old hard work into it. It's probably one of your proudest achievements.

However, at some point you're going to have to think about a subject that may seem completely foreign to you: What's the best way to untangle yourself from the company that you've spent so much time putting together?

You may already be thinking in this direction for a number of reasons--some good, some bad. Perhaps you're looking forward to retiring in a more agreeable climate, you've gotten a purchase offer you want to consider, or your business has done so well that you want to pass it on to your children. Perhaps you hope to "die in the saddle," but you want the business to continue beyond your lifetime, and you don't want the IRS to confiscate your hard-earned gains through estate taxes.

On the other hand, perhaps your business isn't doing as well as you hoped, or it's doing well but you're getting tired of all the time and energy it requires. Other reasons for getting out might include the death of a partner or co-owner, divorce, your realization that the competition is winning out, pressure from family members or employees who think you ought to retire, or your own health.

Don't wait until one of these events hits you over the head--start thinking about your exit strategy now, whether it will be by selling the business or planning for your succession.

Selling the business. In a perfect world, you'd sell your business when the national economy was humming along toward a peak in the business cycle, when your industry was "hot" among investors, and when your particular business was having a banner year.

However, your decision to sell out will probably have much more to do with your personal circumstances than with what's happening on Wall Street. The point we're making is that, everything else being equal, you should aim to sell when things are good, rather than not-so-good or downright ugly.

Regardless of the state of the economy or your industry, there are a number of things you can do to shape up your business to make it more attractive to purchasers. However, this process is likely to take a year or more.

On average, once your business is on the market, it will take another year to find a buyer and complete the deal. If you are planning to sell to family members or key employees, many of the more creative tax-planning methods can take three to five years to put into place.

To develop an exit strategy, you'll need to give some thought to the following:

  • Initial issues: How should you time your decision and who should you choose to help you?
  • Valuation of the business: How does the market put a price on a small business, and what can you do to maximize your own business's value?
  • Finding a buyer: What do you need to know about working with a business broker, creating a selling memorandum, and other marketing concerns?
  • Structuring the deal: What are your options as to terms?
  • Financing the deal: What should you know about seller financing and third-party financing through leveraged buyouts?
  • Completing the deal: What are the typical steps you can expect to go through in the sales process?
  • After the sale: What will your new, unencumbered life be like.

Planning for succession. When a small business is a key component of family wealth, the owner usually has a strong desire to perpetuate it in one form or another. But perpetuating the business through an orderly succession to family members or other insiders is the ultimate management challenge.

Any transition must preserve the continuity of leadership, and it is most important that the succession of ownership and management be perceived as a process rather than an event. Much as some successors might hope otherwise, it's not a matter of deciding to retire at 4:00 p.m. next Tuesday at which time Junior will take the reins or your partner, Charlie, will become the boss, while you'll fade into oblivion (or more likely onto the 1st tee).

Succession is a process requiring planning, teamwork and constant re-evaluation. So infrequently is it done successfully that barely 30 percent of family businesses survive into the second generation and fewer than 15 percent of them endure into the third. If the business of succession is not done by process (through planning), it will be done by crisis (a failure to plan), with perhaps disastrous results.

A typical succession plan has two elements, which should be considered separately:

  • The transfer of power, whereby control over the business's operation is transferred to those best suited to exercising it
  • The transfer of assets, whereby the wealth concentrated in the business is transferred to designated family members, who may be a different or larger group than the person or persons who will be assuming power.
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