Exit Planning for Owners of Smaller* Businesses: The Fork in the Road
*( Less than 50 employees and less than $5M in sales)
Owners are caught up in day-to-day business planning and unless there is a crisis spend their time focusing on new sales, customer relations, and managing operations. Sometimes, the first business “crisis” these owners face is when they contemplate life after business. Then a flood of questions arises – How can I retire? What will happen to my employees? My customers? Can my business prosper without me?
When this moment occurs, we recommend a few basic steps in order to get started.
(1) Talk with your financial advisor to learn the following:
How much income you need to maintain your lifestyle during retirement .
How much income your non-business assets can generate.
The difference between these amounts will result in a “gap” for most business owners that must be filled by the business assets.
(2) Find out how much is your business worth and what are the net after-tax proceeds that you can expect to realize from its sale.
Are these net proceeds enough to plug the financial “gap” that you identified?
When contemplating an exit from their business, these owners are generally faced with a choice between a sale to a third party or a sale to key employees. This is the key Exit Planning decision point for these owners and involves the bulk of our planning work.
Scenario 1: Sale to Key Employees
All other things being equal, many owners will prefer a sale to employees. Owners generally appreciate the role that key employees have played in growing the business and often would like to give these employees a chance at ownership.
Typical question owners will consider:
Do key employees have the financial ability to buy the business?
But that does not reveal the complete picture. The question should be reframed as:
Do key employees have the ability to run the business and do they have the desire to be owners?
Scenario 2: Sale to Third Party
Third-party sales have their own set of risks. Statistics suggest that the “fail to sell” rate for these types of businesses going to market is high – ranging from 30% – 60% depending on the source.
Why aren’t these businesses able to sell?
(1) Failure by owner to set reasonable expectations for value of the business.
(2) Failure to plan
(3) Failure to engage the right transaction intermediary/broker.
The choice between a sale to employees or to a third party is the key decision point for owners of this class of business. Analyzing the pros and cons of each route, making an informed decision, and taking the necessary planning steps is critical for a successful exit.
This blog is an excerpt from my article featured in the April 2017 issue of Business2Business magazine.