5 Steps Toward Successful Business Exit Planning
As a business owner, you've invested time, effort, and resources into building your successful company. But have you given much thought to business succession planning? A well-thought-out business exit strategy can help you maximize the value of the company you've worked so hard to grow—and facilitate a smooth transition into the next phase of life.
Thorough preparation is essential whether you’re passing the company to a family member, selling to an employee or third party, or exploring another exit strategy. Not sure where to start? This article will walk you through five essential steps in business succession planning.
1. Evaluate Your Team
The first step in business succession planning is taking an honest assessment of your leadership team and key employees. Are there promising candidates within the company? If you can’t yet identify an ideal successor, allocate time and resources to mentoring and professional development opportunities to upskill staff. This can help you identify and develop a successor who embodies your values and vision.
If you determine that the right candidate doesn’t exist within your business, consider recruiting externally—an outside party can offer a fresh perspective and bring new ideas to drive the company forward.
2. Weigh Your Options: Business Exit Strategies
As you think about moving on from the business you've built, there are various business exit strategies you can consider. The appropriate strategy depends on your unique goals and financial situation, the industry landscape, and your company’s value. Below, we’ll explore a few of the more common exit strategies.
Generational Transfer
For many family-owned businesses, the goal is to hand off the operation to children or other relatives. This option provides a sense of pride in continuing the family legacy, and often makes it easy to maintain the company’s culture, mission, and customer relationships.
Management Buyout
Under a management buyout, you sell your ownership stake in the company to an existing manager or group of key employees. This exit path allows you to transition the business to people with deep operational knowledge and institutional history. A key benefit can be the seamless leadership and management continuity for both customers and employees.
Partner Sale
If you co-own the business with partners, your exit could involve selling your stake(s) to them. This allows for a smooth internal ownership transition. If you choose this option, open communication will help ensure each party's interests are represented fairly in determining valuation and asset distribution.
Employee Stock Ownership Plan
An employee stock ownership plan (ESOP) is a program that provides employees with ownership in a company through a trust fund. It works as a business exit strategy by allowing you to sell some or all of your company stock to the ESOP trust at fair market value. This facilitates the gradual transfer of ownership to your employees over a period of years in a tax-advantaged way, enabling you to retain some control and maximize value during the transition.
Third-Party Sale
A third-party sale involves marketing and selling your company to an outside buyer, such as a strategic investor, private equity firm or competitor. If you choose this option, working with professional representation may help you negotiate optimal terms and sale proceeds.
3. Value The Business
Once you’ve identified your exit strategy, the next crucial step in business succession planning is determining the value of your business. A thorough business valuation sets realistic expectations and equips you for successful negotiations. While you can conduct an internal valuation, you might also consider obtaining a third-party valuation to objectively assess your company’s financial performance, market conditions and industry trends.
Before conducting or commissioning your valuation, ensure your financial statements, such as balance sheets and income statements, are up-to-date and accurate. Additionally, consider the value of intangible assets like brand equity, customer relationships, and intellectual property, which can significantly enhance your company’s worth.
4. Identify Risks & Challenges
Effective business succession planning involves anticipating and addressing potential risks and challenges. Employee retention is vital during a transition, as top talent may feel uncertain and seek opportunities elsewhere. To prevent this, future roles and opportunities for growth should be clearly communicated to keep key staff engaged and motivated.
Maintaining operational continuity is also crucial. Documenting roles, responsibilities and standard operating procedures can help new leadership adapt quickly, with minimal interruption to daily operations. Additionally, proactively communicating with customers about the transition can build trust and reassure them of your commitment to maintaining the standards and level of service they’ve come to expect from your business. By addressing these risks and challenges, you can facilitate a smoother transition and set up the new leaders for long-term success.
5. Build a Financial Strategy
Having selected your desired business exit strategy and with your business valuation in hand, it's time to build out a comprehensive plan—both for the transaction and for your life after the transition. Your plans should lay out strategies for extracting maximum value and for funding your long-term goals.
Planning the Funding and Structure
When planning your business exit strategy, the way the sale is funded and structured will vary depending on the chosen approach. Although the funding is up to the buyer, you’ll need to perform due diligence to ensure the buyer is qualified and a good fit. Regardless of the path you choose, a well-structured plan can help you extract maximum value from the transaction. This is where having the support of an experienced financial professional can be particularly helpful, as they can be instrumental in developing and implementing these plans.
Although there are several ways to structure the sale, one option is to spread the income over several years through an installment sale, which can provide tax benefits and a steady cash flow. If you plan to retain a stake in the business, structuring an equity rollover may allow you to benefit from future growth. An equity rollover involves converting shares from your previously owned company into a new ownership structure of the acquiring company, allowing you to maintain a stake in the business after the acquisition.
Planning Your Personal Finances and Retirement
The sale of your business can significantly impact your personal finances and your retirement plans. Whether you receive a lump sum or opt for an installment sale, it's important to develop a strategy for investing the proceeds wisely. By aligning your exit strategy with your financial strategy for retirement, you can help position yourself for a comfortable and financially confident post-exit lifestyle.
Business succession planning can take years of preparation and implementation, so it’s best to start laying the groundwork well in advance. Following the five key steps outlined here can help position you for a successful business exit that preserves your company's future and sets you up for the retirement you've envisioned.
If you’re within 10 years of your ideal exit, having a strategy and a plan at this stage is crucial. Contact the office, and let’s set up a time to discuss your vision and goals for your business and your future.
This material was developed and prepared by a third party for use by your Registered Representative. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. The content is developed from sources believed to be providing accurate information.
