Critical Step Needed To Create An Exit Strategy! Part 1 

Some business owners think that selling their business is a matter of getting an appraisal and putting the business on the market hoping for a good offer.

Many business owners that I have worked with initially assumed they knew the value of their business and what they could sell it for.

Through our education process they realized there is much more to selling their business, then just the establishing a value and then going to market.     One of those factors or variables is whether the business owner needs the business value for their future retirement, most do!

Helping the owner figure out what they need for retirement is critical in establishing what they need to sell their business for, and what action is needed to increase the future value of the business (Value Drivers).  In this article I will cover two of the seven steps that  are the most critical when planning a future exit from the business.

Whether the sale is one year or ten years from now, these are the steps needed to sell  a business.

  1. Must identify the Exit Objectives (why, when, and in some cases who) 
  2. Identify Personal and business financial resources; (this is part of the future financial security of the business owner and their family).  
  3. Maximize and Protect Business Value
  4. Ownership Transfer to Third Parties
  5. Ownership Transfers to Insiders
  6. Business Continuity
  7. Personal Wealth and Estate planning

In this post I will cover steps 1-3, and cover steps 4-7 in the June issue.  

In comprehensive Exit planning, (when you break the process down it looks like this):

Your Exit Objectives

  • Building and preserving business value
  • Selling your company to a third party
  • Transferring your ownership to insiders

Your Business and Personal Financial Resources

  • Business Continuity
  • Personal wealth and estate planning

Owner’s goals and aspirations are

  • Financial Need
  • Overall Goals
  • Value based goals
  • Defining the owner’s goals and aspirations shows the client’s wants and needs and identifies what is  important to the business owner. By spending time collecting this information from the business owner we establish a strong relationship, while differentiating you, and allowing you to be the quarterback of the plan.

Accurate information from the owner is critical to planning.      Calculating what the GAP of resources the owner needs to have in order to supply their future retirement income is critical.  It is here where the measurement of their resources helps to decide what they need to sell their business for, to help fund the gap.   

Keep in mind, part of the planning is for the owner to understand that while they owned the company, the company supported much of their lifestyle; from health insurance, cars, entertainment, trips, car repair, life insurance, and a host of other benefits.  Once the owner sells the business, there is no salary or benefits, only the net proceeds.  This is where having a financial advisor is helpful in determining retirement needs, and investment options.

The owner must also realize the tax impact of selling the business, and    the net dollars that they will reap when the sale is completed!   Considering there is no more business cash flow in the form of benefits and salary, the net figure yield from the sale of the business is the income generator.

Chances are most owners would be conservative in their investment of this capital.

 Example: I recently asked a business owner how they would invest their capital once they sold the business, and what rate of return they would expect., He suggested he could get 5% without much trouble. His financial advisor felt the rate would be more like 2-3%.   The advisor took the position that this business owner could not risk losing in the market. The net proceeds from the business were this person’s major asset.

So, questioning the assumptions of the business owner, is using is a major part of this type of planning.

Knowing the financial needs of the business owner is critical and will play a key role in the future sale of the business and how the sale should be structured.

We had an owner who wanted to sell to his kids, the problem was financial.  He had an opportunity to sell  for a greater amount to an outside 3rd party.  The amount was larger than what he could sell it for to his children.  This altered how it looked at the sale, because in his financial life, he needed a certain amount of capital for income flow.  Based on what he needed, we suggested another choice to consider, such as passive ownership.  This would allow him to keep a substantial income over a period, gifting stock to the children.

The long and short of this transaction was about what the owner needed for their retirement. How he could achieve it, which was a greater want and need than whether he sold to his children.  However, with that knowledge of his income needs, we found a solution which ended up satisfying all parties.

In June I will cover steps 3-7 in planning an exit.   

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