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The Importance of Exit Planning for Small Business Owners

Author: Keith Schellin
May, 2017 Issue

It’s estimated that 75 percent of business owners regret selling their businesses within the first year.

A great benefit of being a business owner is deciding when you want to exit your business. Many business owners intend to keep working until they no longer can because their work becomes part of their life and identity. This fear of the unknown causes many business owners to delay thinking about a life-after-business strategy. Many also worry about what will happen to their business without them.

Sooner or later, every owner exits their business. It’s most likely the biggest financial event of their lifetime and it can be either planned, or it can be a surprise.

What most business owners don’t understand is that adding an exit strategy to their business plans will help them minimize their fears and risks because it will prepare them, give them control over what is coming and help them exit on their own terms. 

What is an exit plan, and what is not? 

When a business owner says, "I'll sell it to someone in the next five years," what they’re really saying is: I haven't thought much about it, but I expect these years of hard work are worth something, so it will all work out. Unfortunately, that is not an exit plan.

There are three parts to creating a business plan—understanding where you are; thinking about where you want to be and when; and deciding what you’re going to do once you get there.

First, it’s important to examine your personal finances, your assets and debts.  You need a realistic value of your business’ worth in today’s market, including who might buy it and why. Misunderstanding business value is a huge obstacle to a successful exit plan.  

Second, decide where you want to be and when. Let’s say you want to be out of the business in five years but need a total of $5 million in the bank to live your dream life.  If you have $1million now and calculate your business is worth $3 million, then you’re $1 million short. What are your choices? You have a number of choices. You can cut back on the lifestyle you dream of; delay retirement two more years; build up the value of your business; or find ways to minimize your taxes. Or, you can develop a strategy based on a combination of these choices. Exit planning helps with all of these.

And finally, once you exit, what are your plans for the next stage of your life? It’s estimated that 75 percent of business owners regret selling their businesses within the first year.  The main reason is that most business owners don’t think about, nor plan for life after the business. Again, this should be part of the exit planning process, not something to consider after you leave.

A natural part of the exit planning process is reducing work hours through delegation. During this phase-out period, it’s important that you start finding new interests and devote your added time to them. It must be something that truly interests you, or it won’t work. 

Developing a successful exit plan

A majority of business owners plan to finance their retirement with the sale of their businesses. The quality of life they can expect to have in retirement will be determined by the price they get, but here’s a stark fact: In 2016, only one out of 25 businesses listed for sale in the U.S. sold.  Over the next 10 to 15 years, that number will only worsen. 

What can you do to improve your odds, so your business sells? Make sure you have an exit plan. Here are some of your options: 

  • Close your doors, liquidate and move on.
  • Sell to a competitor.
  • Sell to an employee or employees.
  • Transfer the business to a relative.
  • Turn the business into a performing asset.
  • Sell to a third party.

Most good exit plans take at least five years to execute, which allows you to minimize taxes and maximize proceeds.  Once you have a plan in place, you can choose to implement it whenever you wish.

Keith Schellin is a former and current business owner who has experience building start-ups, purchasing businesses, growing businesses and exiting businesses through sales and transitions. Keith works with business owners in Sonoma, Marin and Napa, but also throughout the Bay Area. He specializes in exit strategies, exit planning and succession planning, and more. For more information, go to corebiz.co. Or, contact Keith at keith@corebiz.com, or call (415) 755- 3684.

 

 

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