If you’re a small-business owner, the following scenario may sound familiar to you: Mary is an architect who owns a 50 percent interest in a small, private architectural firm. She also owns part of the building in which her office is located. She would like to retire in three to five years, but she isn’t sure how to turn her business assets into liquid assets that can generate retirement income.

In order to get top dollar for her share of the business, Mary needs a sound exit plan.

An exit plan is a formal strategy for selling your business when you want to the type of buyer you want and at the price you want to receive. A recent survey of baby-boomer business-owners by Atlanta-based research firm CMI reported that, while 96 percent of business owners agreed that having an exit strategy was important, 87 percent of those surveyed didn’t have a current, written exit plan.

While exit planning is essential for all business owners, it can be especially important for those who own smaller businesses and thus often face unique challenges.

For owners of small businesses, categorized as those that generate between $100,000 and $1 million in annual income, the challenges of selling a business may include:

• Greater variability in sale prices.
• Uncertainty over when and how to sell.
• Lack of guidance and advice for how to get started.
• Potential lack of buyer demand.

For small-business owners, it’s never too early to begin creating a successful exit plan. Many business owners want to establish enterprises that are stable enough that they could leave the business at any time they choose should they decide to exit for health, family, retirement or other reasons.

As you begin to create an exit plan, here are six practical tips to consider along the way.

Start early. It may take anywhere from three to five years to position your business for a successful sale. During the initial planning phase, it’s important to articulate your goals, create a support team of experienced advisers and begin positioning your business for maximum value.

Ask for advice. Talk to other business owners you know who have recently sold a business about their experiences. In addition, begin having conversations with your CPA, financial planner, investment manager, attorney or other trusted advisers about how to begin creating an exit plan. Discuss who will oversee it.

Designate a general contractor. Your exit plan might require the expertise of several professionals, but designate the adviser who will play a lead role in making sure that all aspects of the plan run smoothly. Like the general contractor for a home-remodeling job, your lead adviser will coordinate the efforts of other professionals on your behalf. Choose the professional with whom you feel most comfortable working.

Establish a range of values for your business. Consider what your business is worth from a variety of angles, such as the IRS value of your business, its best market value, its potential negotiated value and a reasonable range of sale values. If you receive an assessment from an independent expert, think of that valuation as simply one perspective among many others that you may want to consider in your exit planning.

Reduce general business risks. Establish incentive plans to retain key employees using vesting schedules for bonuses and stay bonuses. Document daily business operations and emergency plans. If needed, diversify your customer base by implementing marketing plans to attract new clientele.

Maximize cash flow. Unless you’re selling or gifting your business to a family member, you’ll typically want to maximize your cash flow to enhance the value of your business and make its value more easily visible to a potential buyer. If you hope to sell your business to a third party, consider reducing any discretionary expenses for three to five years prior to a sale.

Remember—the smaller your business is, the more variability there may be in its value. With a sound exit plan in place, you’re more likely to get top dollar for your business and may have a higher degree of control over when and how you decide to leave your business. The keys to success are starting early, being patient and asking for help along the way. You’ll feel more confident about your financial future and may find yourself in a better position to live the life you’ve always imagined for yourself and your family.

Tom Griffiths is a certified public accountant, certified financial planner and is accredited in business valuation. He is also the founder of Griffiths, Dreher & Evans, P.S., a Spokane-based wealth-management firm specializing in meeting the needs of today’s small-business owners.

Comments (0)

Subscribe to this comment's feed

Comment

smaller | bigger

Subscribe via email (Registered users only)

Write the displayed characters

Add Comment