Business management articles
Six Steps to a Successful Business Exit
Author: Jason Kwiatkowski
Date: April 2010
Publication: Lawyers Weekly
If you operate your own business, chances are you won’t be in 10 years.
While you may not yet be thinking of the day when you will be exiting your company, you should be. Surveys suggest that up to 40% of Canada’s private business owners intend to exit their businesses within five years – and over 65% believe they will retire within the decade.1
If you intend on “cashing in” on your business to help finance your retirement, it’s important to be aware that the growing supply of enterprises for sale will likely put downward pressure on their sale prices. In order to maximize the proceeds of a sale or to successfully orchestrate the succession of the business to a family member, you must have a proper exit plan in place. An exit plan addresses the business, personal, financial, legal and tax issues involved in successfully exiting from a business and sets out what steps must be undertaken to accomplish your goals upon retirement.
Companies that have invested the time and effort to prepare for sale will ultimately sell for a significant premium over companies that come to market unprepared. It can take several years to properly prepare a business for sale. With the number of businesses for sale rising, it is essential to develop your exit plan now. Here are six steps that can help to make that day financially rewarding.
1) Goals Assessment
The first stage involves creating a frame of reference for the exit plan by clearly defining personal, financial and business goals. “Maximizing my company’s value when I exit,” for example, does not clearly define a desired outcome. Goals must be specific, measurable, achievable, realistic and motivational. “Growing my company from a valuation of $10 million to one of $15 million within five years so that I can retire and net at least $12 million,” is an example of an effective goal.
2) Financial Needs Assessment
The next step involves quantifying the amount needed from the sale of the business in order to accomplish these goals. This requires making certain assumptions (e.g. annual spending in retirement, anticipated rates of return, inflation rates, life expectancy) to estimate a lump-sum amount that you will need when you leave your business. An experienced financial planner can assist with this step of the exit plan.
3) Business Valuation
The third step involves obtaining a current business valuation to establish a baseline value for your business and to identify ways to increase this value prior to exit. An independent professional business valuator such as a chartered business valuator (CBV) can provide an objective, accurate valuation as well as specific recommendations to enhance value. Often, if the value of the business can be increased by as little as 1%, it is worthwhile investing in an independent business valuation.
4) Exit Alternatives Analysis
Step four entails assessing exit alternatives to determine which one is most in line with your circumstances and goals. Options include internal transfers such as sales to family members, existing shareholders, the management team or employees, as well as external transfers such as a third party sale, refinancing or going public.
5) Net Proceeds Analysis
Since an exit plan aims to maximize the sale price of your business and to minimize taxes and other obligations to be paid upon the sale, step five involves quantifying the net proceeds that would be received under each relevant exit alternative.
The net cash received upon the sale of a business can vary significantly from the sales price due to income taxes and other obligations. Net proceeds are the net amount you would retain upon sale after paying these liabilities.
6) Documenting Tasks and Timeline
Step six involves identifying and documenting the specific tasks to be undertaken both personally (e.g. preparing a will, obtaining life insurance, creating an estate plan) and for your business (e.g. developing a strategic plan, improving depth of management). It is also important to document the priority and timing of each task and the individual(s) responsible for them.
In order to move the plan forward and monitor progress, be sure to schedule regular meetings with those involved in contributing to and implementing the exit plan.
Having someone provide an objective perspective and encouragement can help to ensure all of the necessary elements are in place and the timeline stays on track. Thus it may be helpful to delegate the responsibility of coordinating your exit plan to a trusted and experienced advisor like your accountant, lawyer or financial advisor.
While planning your exit from your business may not seem like a high priority right now, consider this….the sooner your plan is in place, the farther ahead you will be in achieving your goals than the other 65% of owners looking to do the same thing in the near future.
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