Baby boomers own about 40% of the country’s private small businesses and franchises, and as they head toward retirement in the next few years, they will need strategies in place to “exit” their businesses, whether bequeathing it to heirs or sell it to outsiders.
Exit planning is important for many reasons, including understanding the total value and profitability of your own company, planning the future of your business, and assessing the impact it will have on new owners, let alone existing employees.
Jeremiah Foster, President and Founder of Resolute Commercial Services, explains, “Exit planning is a premeditated strategy by a business owner to exit a private business when they are ready to turn to other opportunities, retire, or become incapacitated.”, an independent business consulting firm in Scottsdale, Arizona company.
Those who own a business can exit or leave the business in a number of ways, including sale, merger or gift; each option has its own set of costs and benefits. “A properly executed exit plan helps maximize business value, minimize tax burdens and achieve the owner’s personal and business goals,” Foster said.
See also: Inflation hits small businesses hardest in these cities and states
The importance of a proper exit plan
Exit plans are especially important now, as the country is on the verge of an unprecedented wealth transfer. Baby boomers have been the most prolific creators of private companies in U.S. history, with members ages 58 to 76 between. in Phoenix.
“These businesses need to move and transition to successors,” he said. “The challenge is that after the baby boomers, the next two generations combined are smaller than the baby boomers.”
So, what does this mean? “There are fewer and fewer prospects for a successful transfer and transformation of a business,” Canli explained.
Cultivation competition. “An exit plan gives you more control over what happens to your business and your employees, while maximizing your net benefit,” he said.
See also: Baby boomers are leaving the stock market. What happens next, the strategist said.
Exit Plan Basics
David McCarville, director of national business law firm Fennemore Craig, PC, said the success or failure of an exit plan often depends on the owner’s true market value of their business, accurate accounting and tax records and contracts understanding of the law. any rights and obligations to sell its business.
“Understanding the market value of your business requires a lot of planning because you need to look at the market value of your business objectively,” he said. “This should include hiring an appraisal expert who is familiar with your business and can identify for you the specific factors that will make your business more or less valuable to potential buyers.”
You need professional quality accounting records to support your valuation. “Taking the time to review and organize your accounting records will allow potential buyers to complete their due diligence faster, which will save you time and money in the long run,” he adds.
McCarville added that sellers must provide everything in writing to prevent any future misunderstandings. “Ultimately, an exit plan will require a contract that defines your rights and obligations in any business sale,” he explained. “It is therefore essential to understand what options are available to you when negotiating your rights and obligations under any contract of sale.”
do not miss it: 3 things to look out for when you retire – your future self will thank you for it
What are your options?
The most common exit plans follow one of the following paths, Canli said:
The owner remains chairman of the company’s board of directors and delegates the day-to-day responsibility for running the business to the current management team.
The owner cuts all ties to the company by transferring ownership and management responsibilities to someone inside the company, such as a key employee, manager, or family member.
Owners leave the company after selling the company to a competent unrelated third party and then set up their own management team.
There are of course other situations, including mergers with similar businesses or taking a business public by selling shares in an IPO or IPO, Foster said.
you might like: 5 reasons it’s time to retire overseas
Which one is best for you?
To find out which option is best for you, Foster recommends asking yourself the following questions:
Do I want to continue to be in the business in some capacity after I retire or sell out? “If the answer is yes, then handing over your business to a family member or negotiating an employee takeover is the option most likely to keep you as a consultant in some capacity,” Foster said.
What are my financial goals? “Mergers; selling your company to other businesses, partners or investors; or an IPO are options that are likely to provide the highest returns for your business,” he added.
What do I want to happen to my employees and/or customers after I leave? “Transferring a business to a family member, negotiating an employee acquisition or sale to a partner or investor are the options with the least impact on employees,” he said.
How much debt does my business have? “If the company is heavily indebted, liquidation, ABC (assignment for the benefit of creditors, less formal liquidation) or bankruptcy may be the best fit for your situation,” he explained.
When and Where to Find Professionals
As with many business strategies, it is best to plan an exit strategy before you need to use it.
“Good planning requires resources,” McCarville said. “The sooner you start developing an exit plan, the more likely you will save time and money in the process.”
Financial experts recommend that small business owners hire an exit planning professional and set aside time to work with them.
Trust is a key factor to look for when choosing a professional to help you with your plan, Canli says.
To build trust, he recommends asking potential advisors to share some of their success stories, discuss some of their failures, and discuss whether you should expect a return for what you’ll pay.
Experience and Communication Matter
“Past experience and good communication skills should be your top priorities when evaluating exit planning professionals,” adds McCarville, whether they’re a lawyer, valuation expert or accountant. “Communication is difficult, and miscommunication in an exit plan can lead to serious mistakes, wasted time and lost value.”
Generally speaking, those with exit planning skills agree that now is the best time for owners to start developing an exit strategy for their business.
Many business owners avoid having candid conversations about exit plans, perhaps because it reminds them of their deaths, or suggests they are no longer needed by the business, Canli said. This is a mistake.
“This conversation is not only critical for the owner or founder,” he said, “but also for the employees and families that the business supports.”
Michelle Talsma Everson is a writer and editor from Phoenix, Arizona. She writes for a variety of media and believes in the power of storytelling to illuminate important topics that have an impact on people’s lives.You can see her work mteverson.com.
This article is reproduced with permission NextAvenue.org© 2022 Twin Cities Public Television, Inc. All rights reserved.
More from Next Avenue: