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Prepare To Exit

Exiting a business with financial success takes knowledge and planning.

Change is an inevitable aspect of every life cycle. With business, the final evolution can take a variety of forms. You may be ready to retire and pass the business on to a family member. Perhaps your goal is to sell to outside investors and use the proceeds as a retirement nest egg. Or the business may have declined so much that the best exit is a legal dissolution of your company. These tools and resources will help you manage the big decisions ahead for a successful transition.

Why you (and your business) need an exit strategy

Alvin Fritschle

By Alvin Fritschle

Alvin Fritschle is the Chairman of the Board of First Bank, a community bank serving Southeastern Illinois and Southwestern Indiana. He has provided financial advice to numerous entrepreneurs for over 40 years as a certified public accountant and the President of First Bank. Over this time, he has demonstrated a strong commitment to assisting his clients with their strategic decisions.

A recent survey found that less than 43% of family-owned businesses have a succession plan in place. While most business owners would like to see their business remain in the family, less than 30% of family owned businesses will be passed on to the second generation and only 12% will be passed on to the third generation.

What is the disconnect?

First, people do not like to think about change and will procrastinate. Succession planning requires the business owner to confront tough questions such as:

  • What will I do when I retire?
  • How can I be fair to both children involved in the business and those not in the business?
  • How much income will I need in retirement?

Additionally, many business owners convince themselves that they are too busy to prepare a plan. Others have been making all of the decisions for so long that they are reluctant to delegate responsibility.

Second, demographic changes have significantly impacted succession planning. The number of children per family has declined, and the likelihood that one of their children working in the family business has also declined. In 1900, the average family had 3.5 children, which dropped to 2.2 in 1950, and is now less than 1.8 children per average family. Besides the fact that there are fewer children in today’s family, they are also more highly educated. In 1957, only 10% of people between the age of 25 and 29 had a college degree. Today, that percentage has increased to over 30%.

Third, technology presents a challenge to the viability of many small businesses. Historically, a large portion of small businesses were in retail sales. Today, Amazon and Walmart have eliminated many of those “Mom and Pop” shops. Artificial intelligence may have a similar impact on many service-industry jobs in the near future.

What is the difference between succession planning and an exit strategy?

I often hear talk of succession planning and exit strategy as if they are the same thing. However, there are subtle differences between the two.

  • Succession planning is a formal outline for your business’s operation in the event that you can no longer mange the day to day management of your company, whether temporarily or for an extended period of time. Unplanned exits from a business do happen, so it is imperative to have a succession plan in place. That way, your customers do not experience an interruption in service. If customers leave during this time of instability, the value of the business will decline quickly.
  • An exit strategy is a plan that lays out what will happen with your business when you decide you’re ready to leave. Succession planning is also a part of any good exit strategy.

You may think that exit strategy prepartion is only for business owners approaching retirement age, but this is not the case. Many times, I have heard business owners say that they do not have to plan for retirement because they will simply sell their business to provide a nest egg for retirement.

More often than not, the business does not sell for as much as the owner believes it is worth, leaving a shortfall in retirement funding. Another common occurrence is the early demise of the business owner, leaving their surviving spouse to sell the company. Buyers rarely pay full value for the company in a distressed sale, and then the surviving spouse’s retirement is significantly underfunded.

When it comes to planning your exit, the earlier you get started the better. If you wait until retirement is imminent, your options may be limited.

Reasons for exiting your business

There are numerous reasons for a business owner to exit his/her business.

Business or professional reasons may include:

  • Changes in the market make it more difficult to manage a small business.
  • You are not satisfied with the profitability of the company.
  • You receive an unexpected purchase offer that is very attractive.
  • You are presented with a new business venture that appears to be lucrative.
  • You receive a job offer that is more profitable than running your own business.

In addition to business reasons for having an exit strategy, many people have personal reasons for leaving the business that may include:

  • Retirement is the most common personal reason to exit your business.
  • Health concerns are another common reason.
  • Burnout from working long hours and stress.
  • A desire for new challenges.

6 Reasons to begin your exit planning early

Whatever your reasons for developing an exit plan, to be effective you must start early and not wait until you are ready to retire to get the full value for your company. Most consultants believe it takes a minimum of 5 years for an exit plan to be executed properly.

The following are the primary reasons to begin the planning process early:

  1. The longer a business owner waits to begin the process, the greater the risk that the plan will not meet the owner’s goals,both personal and financial.
  2. The longer a business owner waits, the fewer options are available to them in exiting the company. It takes time to develop a successor’s management skills, whether it is a family member or an employee.
  3. If a business owner is disabled or dies before they complete an exit strategy, the value of the business will frequently drop.
  4. If you have an exit plan in place, you are controlling the process rather than leaving it to your heirs to work out.
  5. If this is a family-owned business, a succession plan that has been developed by you will help preserve family harmony by making decisions in advance.
  6. During a business owner’s life, his/her self-image is often directly linked to the success of the business. Whenever the owner is no longer associated with the business, they often struggle with their self-image. Early planning for this change gives the owner time to adjust to their new role and develop new interests in retirement.

Assemble a team to assist you in developing your exit plan

Most entrepreneurs find exit planning to be a daunting task, so they procrastinate. To make the process go more smoothly and be more effective it is important to have the assistance of outside professionals.

  • Your accountant has probably assisted other business owners with their exit plans. They can provide you with assistance in updating your financial systems and may be able to assist in calculating the value of your business.
  • Your attorney’s assistance may be required to prepare non-compete agreements for key employees and confidentiality agreements for prospective buyers to protect your trade secrets.
  • A business broker can provide you a great deal of insight into what a prospective buyer is looking for in a business. They can also make the process run smoothly when the time comes to put the business up for sale. They also assist with valuing your business.

Asking these professionals about weaknesses in your business early on will give you the time to develop a plan to correct these weaknesses and enhance the value of your company.

Parts of a good exit strategy

A good exit plan has several parts that take time to develop.

  1. Define your goals for what you want to accomplish in your exit plan.
  2. What will your financial needs be once you exit your business?
  3. A determination of the value of your company.
  4. A plan to fund the gap between the value of your company and your financial needs in retirement.
  5. A plan to fix any weaknesses in your company to make it more attractive to potential acquirers.
  6. A plan to train family members or members of your management team to handle the day-to-day affairs of the company should you not be able to do so.
  7. Identification of potential buyers.
  8. A timeline for everything to be done.

The primary purpose of your exit plan is not about planning for tragedies, but about seeing that your successful business continues after you leave the company. It is about defining your goals and achieving them.

Ready to start your exit plan? First Bank is here to help you Make Great Things Happen. Read the next article in this series: Defining your goals for the exit plan.

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