Planning an Exit Strategy for Your Small Business
Most successful small business owners have dedicated a significant portion of their lives to building their business. Energy, time, and often the main share of their family net worth ends up in that company. Through all of the ups and downs of economic cycles and market opportunities, the small business owner has invested his soul to better the enterprise.
Now, according to the Financial Post, three in four small business owners are set to step aside in the next 10 years. This will be a major generational shift that will affect a lot of people and ‘stepping aside’ in a small business is not necessarily an easy matter.
In selling a business, whether an emotional sell or otherwise, the business owner must face practical issues and problems that potentially stem when walking away from a lifetime commitment. It should be pointed out that turning over a small business can be complicated and can also take a lot of time and energy; it does not just happen overnight! Every business owner should consider an exit strategy and earlier in the game the better.
For the purposes of this discussion, we will ignore the complications of business partners and assume that there is a strong shareholders agreement in place allowing the owner to make decisions independently. These decisions are determined possibly by the state of family relations and definitely by the state of the business. Typically, a small business owner works in a lonely space without a large team of peers to rely on for input. Working through the options and obstacles to reach the best course of action can be challenging. The following are two issues to consider:
State of the Business
Many small business finances are intertwined with the owner’s finances and/or in complicated arrangements. In order to walk away from a business, the business must be able to stand on its own financially. If selling to staff, once you have left, they must be capable of growing and managing the business without you. If you are selling to a third party, it will be necessary to clean up all of the reported finances of the business to allow for that business to stand on its own two feet. The ‘worth’ of the business is very dependent on being able to present a clear picture to a potential buyer of how the business has done in the past and how it will do in the future
Family Considerations
If considering selling to a family member or members, there is a basic need for a realistic analysis to determine if there is, in fact, someone in the family who will want to take over the business from you and if that person is financially or strategically capable of doing so. Are there sufficient funds available within, and/or already extracted from, the business that will allow you to enjoy retirement? Is taking out those funds from the business detrimental to the continuing prosperity of the business or if in paying you out from the business, can the person taking it over, generate enough profit to support payment to you over the longterm? And…how will this affect the long term relationship with the family?
Additional Considerations
In addition to the above hurdles, there are a myriad of legal and tax matters that must be addressed which will impact the final dollar amounts realized from selling or turnover.
It often takes several years of planning and adjustment to get to the point that a business is ready for sale; not to mention finding the right purchaser, whether family or other. Professional accountants, merger acquisition companies, or other financial consultants versed in exit planning should be consulted for the technicals.
ASE is regularly asked for input from clients as they venture through various stages of the retirement process and selling of their business. As retired business professionals having run our own businesses and successfully exited from them, we, as a group, have faced many of the issues arising in selling a business and are well acquainted with the options and obstacles with this stage. It has been our great pleasure to see some of our clients, after many sessions of discussion, very successfully sell their businesses too.
Fletch Keating ASE