Everyone
who operates a company will eventually reach a point when they will have to
leave the business because of age or health concerns. This could mean
retirement, sale or simply winding up the firm and closing it down.
Collectively
these are known as exit strategies, and every business owner should have one.
Yet many will exit their companies without a clear plan. This may be largely
due to the fact that entrepreneurs are more focused on starting and building
their businesses than on leaving them.
The
result? When business owners are ready to pass the torch, they may not get the
full value of their company if they're selling to outside interests. Or if it's
a family transfer, they could end up leaving family members with unmanageable
problems instead of the inheritance they had hoped to bestow.
You can
always make better business decisions by planning ahead. If you start to think
about succession planning early, you can take a more objective look at your
future needs and avoid last-minute decisions. Although unique to every
business, a succession
plan consists of a series of basic steps, such as setting your
financial goals, determining legal requirements and establishing your
objectives with your family or successor. It is often a complex and sometimes
emotional process for a business owner.
"One
of the most important steps is first knowing all the options available to you
for exiting," says Calvin Hughes, a BDC consultant. "It's important
that you feel active and engaged in the process. But at the same time, you have
to accept that you're letting go of your business."
Here are
some of the most common exit strategies used today.
Family
transfer
If transferring
your business to a family member is a possibility, it's key to
ensure that your family is fully aware that you're planning a succession and to
give them clear time parameters. A part of this, says Hughes, is ensuring that
family members get a chance to voice their concerns and interest in the
business. One of the most obvious advantages of opting for a family transfer as
an exit strategy is that your family will benefit from your business legacy. As
well, family members who are already involved in your business may require less
coaching or involvement.
Management
buyout (MBO)
The
purchase of a company by its management team has several advantages for
entrepreneurs. It can ensure uninterrupted continuity because the new owners
already have invaluable experience with the company. For this reason, your
company is more likely to keep its existing clients and business partners.
Selling
to outside interests
Selling a
business to outside interests is the most popular exit strategy because it's
typically "more definitive and involves fewer variables than a family
succession," says Hughes. Entrepreneurs should appreciate that the price
they receive for their company might be more or less than the appraised market
value. "While many business owners tend to overestimate the pricing of
their businesses, a surprising number may underestimate it. For example, if
your company becomes part of a much larger venture, then the value may go up
accordingly," he says. A large corporation that is buying out a business,
for instance, may be able to do more than you have with your business and
therefore willing to pay a higher price.
Getting
the full value for your business
Whether
you're passing the company to a family member or selling it to outside
interests, keep in mind that you will need a business valuation that
establishes a realistic and fair dollar figure for your business. "Putting
that dollar value on a business takes time, and you need to have a specialist
who can look at your assets, liabilities and goodwill with an objective
viewpoint," says Hughes, adding that he has seen too many cases of
entrepreneurs who got caught at the last minute and weren't able to get the
full value they had envisioned.
For
entrepreneurs who choose selling as an exit strategy, Hughes feels they should
also be aware that buyers are increasingly more sophisticated and demonstrate
more business savvy. "Smart buyers will certainly delve more into your
business history. So in turn, you have to anticipate this and be sure that
you're armed with the right figures and backup material to get the value that
you're looking for. You don't want to find yourself in a vulnerable
position," he stresses. Company owners should keep in mind that the value
of a business is not just based on financial statements. "The number of
customers you have, for example, could also be a determining factor," he
says.
Planning
ahead
One of the first steps in good planning is to get a
lawyer involved at least 12 months in advance. Getting legal help as early as
possible in the process can help you avoid frustrations down the road such as
delays, extra expenses and ultimately a deal that doesn't meet your
expectations.
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