Planning an Exit Strategy?
According to the United States Census Bureau half of all businesses are owned by baby boomers. This means that the owners are between the ages of 53 to 71. The Census Bureau also states that the average age of retirement in the United States is 63 years old. This means that half of all business owners are at the average age of retirement or less than a decade away from it. If you find yourself in this category are you actively planning an exit strategy?
Successful business owners spend decades building their business but many only spend a minimal amount of time on planning for transitioning the company at the end of their careers. I’d be willing to bet that most businesses owners have some sort of life insurance. The main purpose of life insurance is to ensure that your family is taken care of in the unfortunate event that something tragic should happen in the future to the person being insured. Perpetuation or succession planning is very much a similar idea. It’s not only planning for the inevitable retirement of a business owner but also for unforeseen events. If a business owner were to pass away unexpectedly his or her business could potentially have to close its doors in a short period of time if proper planning had not been done beforehand. This could result in the potential loss of hundreds of thousands or even millions of dollars in future earnings for the owner’s family.
Depending on what type of business you have and how it’s structured will determine what potential options are available to you when planning an exit strategy and how your company will operate in your absence. The four main types of exit paths are family, partner, employees or an outside firm. Each has their pros and cons and as mentioned, all options may not be available.
If you have a business partner or partners then selling your shares to them is the likely option. All owners should have a common understanding of just how much the business is worth. An updated buy/sell agreement should also be in place. This is a written agreement that would trigger if one of the owners should pass away unexpectedly. It is very important that this document be updated on a yearly basis as a company’s valuation could increase or decrease significantly over time.
Many small and medium-sized businesses have multiple family members involved in them. If the owner has sons or daughters in the company typically he or she will transfer the company to them and work out a payment plan over the course of many years or until he passes away and they inherit it. This is usually the preferred option. The drawback is that the owner does not receive a large lump sum like he would with other options. It should also be noted that person or persons taking over the company should begin training for this role years in advance. Lack of this training could have serious consequences such as lost clients or suppliers which could negatively impact both the buyer and seller financially.
If an owner does not have any partners or family in the business he may opt to sell his business to one single employee or multiple employees. This is a great option for owners with longstanding employees. Typically there will be a similar payment plan as with the family member buy out. The advantage to this strategy is that usually the employee or employees buying the company are high ranking and have had many years of experience. Therefore, the transition would be much smoother than the transfer to a potentially less experienced family member.
The last option would be to sell to an outside person or company. This is the preferred method for many business owners who are in the later stage of life. The reason being is that typically this will involve a lump sum buy out rather than payments over time. The owner will therefore not have to be concerned with the future profitability of the company. One of the major drawbacks is the negation of that buy out. Many times the owner values his company much higher than an outsider would. Another issue is dealing with assets and employees. The person or company buying your business may just want the name and the contracts you hold. They may be unwilling to take on current employees or assets such as equipment and property. This can become quite stressful for a business owner as negotiations can last months.
Whatever a business owners exit strategy is the important thing is to begin planning and to start that process now. You are never too young to start this process. If you have family in the business start training them now in different areas of the business so they can become well rounded and understand all the inner workings. If you don’t have family, then start identifying key employees and provide similar training to them. Lastly, start having conversations with friendly competitors. You may find someone who is looking to expand and could be a great fit to purchase your company in the future or they could offer friendly advice or a firm they have used to help them plan.