Do you have an Exit Strategy?
By Christopher Nowell, CPA
Starting a business is the difficult part – years of planning, toiling, gnashing of teeth over the latest crisis. The real joy is when you decide to leave, right? It would seem that this phase should be fairly straightforward, whether selling the business to another party or simply closing the doors. It can be that simple, but in order to maximize your investment and make the transition as seamless as possible, any business needs a well-thought-out exit plan that’s in place well in advance.
So what is an exit plan? In sum, an exit plan fully examines an existing or planned business, its value and interested parties, and creates a strategy for the current ownership to leave the business, ideally at the time and under the financial circumstances desired by the owner.
First, it’s important to take a full inventory of the business and its real value. The value of a business includes not only hard assets, but valuable intangibles as well, such as reputation, goodwill, trade marks or brands, client base, or affiliations and associations with referral sources, for example. What components of the business are of real value to another person or business?
Then you’ll want to fully explore all stakeholders in the venture. Though they may not be identified as partners, there are many people who may take an interest, whether financial or emotional, in a business. There are possibly co-owners, investors, key employees, vendors, clients or even family members who are involved with or will feel affected by a change in ownership. It’s important to consider them all, both with respect to the effect a change will have on them and as potential new owners.
After fully analyzing the value of a business and its stakeholders, an owner can begin to develop goals in an exit plan. These may include financial considerations from the sale or transfer to making sure that a devoted employee or special nephew is taken care of beyond your involvement.
The options for the sale or transfer of a business are plentiful and diverse:
Transfer to a family member
Gift of interest in trust
Sale of the business to a family member
Sale to co-owners
Sale to management
Sale to an Employee Stock Ownership Plan (“ESOP”)
Sale to a third party
Refinance the business (Leveraged Buyout)
All of these options have a variety of ways to be structured, and one plan does not fit all situations. Any plan should involve the counsel of trusted financial advisors and an attorney that specializes in business transfers.
Beyond the sale or transfer of a business, an owner must have a comprehensive financial plan to ensure that the sale does not affect his or her financial situation negatively. You’ll need a plan to replace any revenue, income or benefits that were formerly derived from the business.
With appropriate planning and good counsel, the rewards should be plentiful and the transition of the business seamless, leaving you to worry only about how to spend all the tangible assets (hard cold cash) from the sale, and best of all, what to do with all the new intangible assets (time) now on your hands.
Christopher Nowell is a principal with Jarrard, Nowell & Russell, a certified public accounting and business advisory firm based in Charleston. Chris can be reached at (843)723-2768 or firstname.lastname@example.org.