“While 54% of business owners plan to leave their businesses in the next 10 years, 72% [of those] have taken no exit planning action,”* according to a recent study. For most business owners, their business is by far their largest asset, and not properly planning for its transfer can put them, and their employees and family members at risk. Being prepared is the key to success. It starts with educating yourself about your exit planning options, allowing enough time to plan, seeking the best advice, and creating a Business Ownership Transition Plan (BOTP). A BOTP is a comprehensive written document that outlines how and when the ownership of a business will be transferred to others, either internally or externally, in order to achieve your long-term financial and personal goals.
Here are some of the steps business owners need to take to get started.
- Start well in advance. It takes a lot more time than you may think to exit your business, especially if you have to groom your successor or increase the company’s value so you may net enough money from the transition to fund your lifestyle goals.
- Identify and outline your personal goals and what the ideal transition would look like. You may have sacrificed your personal passions and interests in order to devote all of your time, money, and mindshare to growing your business. Your identity may now be one with your business. It takes time to figure out what you want to do when you don’t have to spend every waking hour at the business. Start this process by taking regular time away from the business as you inch closer toward the ownership transition.
This will provide you with some emotional space to reconnect with the world outside, think about how you want to spend the rest of your life, and begin to understand the characteristics of your ideal exit plan.
- Calculate how much money you will need from the sale of your business. As we discuss in our book Cashing Out of Your Business, many owners don’t save much money outside of their businesses. However, this is critical to diversifying your holdings and reducing your financial risk. Taking stock of your assets and knowing the value of your business will allow you to understand just how dependent you are on your business. And by analyzing your personal income needs, you will be able to quantify just how much money you will need to net from the sale of your business.
- Understand the implications of deal structure and taxes. The vast majority of owners know very little about taxes, depending on their CPA to minimize their taxes every year. When it comes to selling your business, however, we recommend that you get at least two knowledgeable advisors to weigh in on the financial implications of your deal structure and taxes. There are various options, and the tax ramifications can be dramatically different. Other considerations when you pick a structure include your desired timeframe, level of control, involvement, and liability during the sale of your business. For example, some structures involve losing control on closing day, while others allow you to maintain control until you collect your last dollar of the sale price.
- Consider working with an objective advisor. There are a lot of moving parts to planning the sale of your business. An independent and objective advisor, who is trained in ownership transition planning, can guide you through the process and help you to understand all the decisions that will need to be made. Most owners will run only one business in their lifetime, and that business is their ticket to financial independence. You may only have one chance at getting this right. There is no downside to planning and a tremendous upside to being prepared.
- Create a holistic exit plan or Business Ownership Transition Plan. The best way to maximize your business value, as well as increase the likelihood for a successful ownership transition, is to be prepared. When done correctly, exit planning aligns your goals and objectives with the best sale or transfer options available and provides a comprehensive roadmap to a successful outcome. This cannot be achieved by addressing revenues or profits alone, and it is not something achieved through luck or chance. It is achieved through careful planning and preparation well in advance.
As a business owner, you are unique – your situation, circumstances, challenges, goals, and objectives are all specific to you. That’s why when it’s time to transfer the ownership of your business to someone else, the exit planning process should take all of this into account.
* Source: Securian Financial Group