Planning for Retirement as a Business Owner: What’s Your Exit Strategy?

Implement an exit strategy from your business before you’re ready to retire

Smart business owners always have an eye on the future. They think that sooner or later, they’re either going to sell the business or pass its management into other hands. But to make either event happen requires strategic thinking with numerous variables that should be considered far in advance. As the Millennial generation of entrepreneurs comes of age, they’re on the lookout for businesses to buy. In fact, over 12 million privately-owned businesses are set to change hands in the next 10 to 15 years.

When planning an exit strategy from your business, it’s vital to not only begin early but to be realistic in your expectations. Selling it or passing management to others is frequently expected to be a smooth and painless process – but the reality can be quite different. Preparing well is the key to achieving your exit goals.

Contemplating the exit of your business

Consider the nature of your exit. Will you sell your business on the open market?  Transfer it to a key employee? Keep it within the family? Understanding who might take over will help you determine an asking price or structure the means for them to buy it. It is rarely too early to start thinking about these alternatives.

Exit strategies, plural

You don’t really know what will be the eventual exit approach. The key is to have a plan that contemplates multiple outcomes; a Plan A and a Plan B. If Plan A is to sell to an outsider, you need to create a truly saleable enterprise. Critical steps include solidifying customer relationships, building a strong organization, creating repeatable processes, systematizing your business, and making yourself eventually replaceable. However, maybe you won’t want to sell on the open market when you are ready to exit. Perhaps you realize that the market is soft, and it will generate less interest than you thought it would. That is where Plan B, a back-up strategy, becomes valuable. In either case, your exit strategy still requires a solid succession plan. You’ll need to identify and mentor a replacement to ensure they can run things after your departure—this could be a family member, a key employee, or even an outside hire.

This is an organic process that takes place over a long period of time, well before a contemplated exit, and during which the business can change direction or focus. It means creating a timetable for your successor to meet their new responsibilities, evaluating their capabilities, mentoring them in aspects of the business that they need to learn, and setting clear dates on when you’ll be giving up control. It might mean hiring new people who can better perform functions you presently provide.

The value of your business is as important as your asking price

To set a fair asking price, start by researching the selling point of other businesses in the market that are similar to yours. This will give you an understanding of what a realistic range might be. Then, have its worth evaluated by a third-party to reach a final number.

Put yourself in the shoes of a potential buyer and prepare answers for every question you would ask. Are there any special areas in which your expertise may be invaluable after you’re gone? If so, you will need to identify someone who can fill that role. The easier you can make it for a successor, the better.

After detailing the facts and figures, be sure to give an honest appraisal about the business’s prospects. Optimism is one thing, but setting unrealistic expectations might spur a misrepresentation lawsuit. Don’t go overboard. If the value of your business is in your customer base, make sure the relationships can endure a change of leadership.

Interested parties will conduct due diligence, requiring detailed records of every aspect of your organization. The higher the quality of your operational records and solutions to any issues, the greater your chance of accelerating the exit process. You will of course conduct your own due diligence on the buyer to ensure they will be reliable stewards of your business.

Finding someone to buy your business: They won’t come just because you built it

Successful owners are justifiably proud of what they’ve built, but that pride can lead them to overvalue their business. In addition, many owners assume that buyers will flock to purchase a successful enterprise, when the reality is that attracting them may take some time and effort. Even when a potential buyer is found, many owners are surprised that an interested party won’t purchase the organization outright.

The solution is to either firmly negotiate and structure an outright sale, or acquiesce to an installment purchase. In many cases, a buyer will purchase a part of the business to obtain a vested interest, but also require the existing owner run things for a period of time, which could be upwards of a year and a half.

An installment purchase gives the buyer a way to verify that the business performs well before they complete the transaction. If the organization hits a set of predetermined performance objectives, incremental payments are made until the asking price is fulfilled.

This is a critical juncture in the exit process; failure to perform during an installment purchase can mean no sale. Business owners must seriously consider the aptitude of any potential replacements who will run the business during this time, as well as the length of their commitment for guiding the business after an agreement is reached.

Orchestrating your exit through an internal transfer

If you plan to sell to a qualified subordinate or a family member, you may also need to devise ways for them to be able to afford to buy you out. You still want to create ways to extract value and cash from the business, even if you are working toward an inside sale. This scenario could mean backing your successor on a loan, building a sinking fund for the purchase, or creating a payment schedule that allows them to set money aside to complete a sale when you are ready to retire.

The power of three: Plan your exit, your succession, and your retirement

If you’re looking to quit the workplace for good while getting a succession plan in place, don’t forget to look after yourself by planning for a successful retirement and considering the financial security of your loved ones. If your business is shared among a few owners, then obtaining a cross-purchase agreement will help cover retirement as well as unforeseen circumstances.

No matter which exit model suits you, the very fact that you have a strategy is of immense value. Taking these steps not only gives you options when it comes time to sell, they actually contribute to the value of your company while you are still running it, making it more attractive to buyers on the open market. The beauty of a comprehensive, well-planned exit strategy is that it ups the chances that you won’t need most of it—an outright sale at a lucrative price may be more likely.

Having a team of competent advisors is key to formulating your exit plan. If you need an ally who can help you quarterback the team and structure your exit plan, including succession plans and retirement plans, call us at 954-684-3284 or contact us online for a free consultation.