By Armando Ojeda, Certified Mentor, Southeast Michigan Chapter of SCORE
“My business is up for sale, but I haven’t gotten the right offer.”
“I’m going to hand the business over to my children so they can keep it in the family.”
“When I die, my business is gonna die with me!”
These are answers business owners frequently give when asked what they plan to do with their companies when they decide to retire. Their responses reveal the level of thought that has been put into the process of cashing out or keeping the business going for another generation.
Lawyers advise that an exit strategy should be considered when the entrepreneur is preparing the start-up business plan for the company. Similar to a prenuptial agreement, the exit strategy works as a risk management tool that protects the assets of the owner should there be unanticipated changes to the business.
What are the elements of an exit strategy? Fundamentally, there are three avenues for exiting a business:
1. Sale of the company
Selling a company requires a team of outside experts and advisors. These professionals support the owner in determining a value for the company, preparing financial documents, assessing the viability of prospective buyers and negotiating the sale.
Preparing a company for sale takes time, a two- to five-year time horizon is not unusual, depending on the size and complexity of the business. The business owner needs to Identify and retain the right advisors and set aside dedicated time and an expense allocation for this purpose. These advisors can help the owner decide whether to take the payout in a lump sum, in installments over time or to provide seller financing. Being clear about how your wealth will be managed post-sale is extremely critical.
Who is the best person or management team to take over from the founding entrepreneur? This is a hard question, because in many ways, a closely held business reflects the attributes and personality of the business owner that are difficult to replicate.
In this case, outside human resource strategists can be helpful in delivering an assessment of identified candidates to determine if they have the right combination of attributes and skill sets to successfully take the company forward.
Often, entrepreneurs consider relatives as an option if the goal is to keep the business in the family. It’s important to look at a family member’s interest and involvement in the business, as well as their capability, to determine if they are a fit for this important leadership role.
Members of the company’s executive team are also possible candidates since they have experience. But can they close the deal? Are they able to secure the capital and resources necessary for a buy-out? Is the business owner inclined to provide financing to ensure a smooth transition?
3. Closing the company outright
This is typically an involuntary exit -- one to be avoided. A closure means the owner has run out of time and options because of poor or no planning. This also means the owner has left a lot of money on the table and diminished the wealth he/she created over many years of hard work.
In some cases, if the owner is a sole proprietor and it is a small lifestyle business, it may make sense to sell whatever assets there are and close the doors.
If you have not done so already, the time to begin preparing your exit strategy is NOW! Being prepared to exit gives you, the business owner, maximum leverage because you will be clear about what you want to get out of your business, the value of your assets, and who the best people are to fit into your role.
Preparing and implementing a viable exit strategy enables you to withdraw the full value of the wealth you have created. Think of your business as your personal retirement fund and consider how much money, time and effort you have invested in it over the years. Failing to put in the effort on an exit strategy or succession plan will make the process of monetizing and transferring the wealth difficult and disrupt your business and personal life. Not to mention, negatively affecting your financial future.
About the Author
Armando Ojeda is a Certified SCORE Mentor, business association executive, serial entrepreneur and retired Fortune 500 executive. He has an active interest in helping business owners navigate the B2B supply chain and in raising awareness of the importance of having an planned exit strategy. Armando believes that having a plan for transferring your business to new ownership is a serious responsibility you owe to yourself, your family, employees and customers.
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