As a small business owner, you’re probably not thinking about selling your business or retiring. After all, a majority of small business owners aren’t ready to sell their businesses or quit working, and two-thirds of them anticipate that they will have enough money to live comfortably in retirement, according to the latest Wells Fargo/Gallup Small Business Index.
Still, a third of business owners think the best time to sell their business will be in the next three years. Since the business often represents the single largest asset on many business owners’ personal balance sheets, its value can represent a lifetime of focus, energy and work. This can make the time spent planning for a business transition a period of high stress and emotion.
For this reason, many owners find participating in a comprehensive business exit-planning process especially valuable. Business exit planning helps business owners to clarify their business transition and exit planning goals, objectives and motivations, including identifying when and how they intend to transition from the business or retire.
The exit planning process consists of these six sequential steps:
- Identify business exit planning goals and objectives –Explore personal and business objectives and the ideal transition timeline. This can entail learning more about an owner’s personal financial and retirement planning goals and needs, the senior management and leadership team, rank and file employees, and other stakeholders.
- Analyze the business –Industry dynamics, company performance and positioning, and market conditions can greatly impact what a company is worth – and, therefore, an owner’s transition alternatives. This step often incorporates economic and industry specific research, in addition to financial statement analysis and industry benchmarking. The company’s plan for management succession should also be reviewed.
- Determine a preliminary range of values for the business –Regardless of the method of transitioning the business, a preliminary estimate of what the company is worth helps to confirm that the anticipated range of values is acceptable (i.e., not too low) from a shareholder’s perspective. This estimate is especially helpful early in the business exit planning process, as shareholders assess, evaluate and compare the economics of different transition options at the same time.
- Identify transition options –Most owners face a predictable set of strategic alternatives for the transition of their business. These alternatives can differ in material ways depending on an owner’s objectives, the company’s positioning within the industry, and market conditions. In addition to multigenerational family business transfers, the business exit planning process typically includes a review of several transition options at the same time, ranging from maintaining the status quo to going public through an initial public offering (IPO).
- Review options for funding or financing the transition –Sources and uses of available funds often determine or limit an owner’s business transition and exit planning options. Most transitions involve some form of financing or funding from a debt or equity sponsor, such as a commercial bank, mezzanine capital, private equity, etc. Otherwise, by default, seller financing can play a large role in a transition.
- Develop an implementation strategy and timeline –Implementing a business exit plan requires a team of professionals. In addition to a CPA and attorney, a business may often need an experienced investment banker, business appraiser and/or other specialists to help implement the strategy. This requires communication and early identification of the necessary steps, as well as estimating a timeframe for completion and naming responsible parties for specific aspects of the business exit planning process.
While business transitions can be complex, following a disciplined process can help owners to confidently plan and execute a successful business transition and maximize outcomes for all stakeholders.