Planning how you exit your business is just as important as planning how you start it. When creating an exit strategy, a business owner should start at least two years before retirement, but the more time available to plan the best strategy, the better it will work out for all involved.
The first step is to create a team of experts that is well versed in business succession strategies, finance, estate planning, investment planning and tax laws.
The next step is to determine the company’s fair market value. The best way to do this is usually to hire a valuation expert to analyze the business and assess the value of the business and its assets, including inventory, equipment, accounts receivables and good will. The fair market value of the business is often a multiple of the sales of the business over the past few years.
“With a good team of advisers and a solid valuation in place, the owner can then begin to strategize the best path to move toward his or her exit,” says Kim Milder, a vice president and senior relationship manager with Wells Fargo Bank.
Smart Business spoke with Milder about exit strategies and succession planning options and why succession planning is so important to today’s business owners.
What are some of the different succession planning options?
The owner can sell the business to employees via an Employee Stock Ownership Plan (ESOP), to family members via a family succession plan, to other owners or key employees through a buy-sell agreement, or to a competitor or other third party.
An ESOP allows employees to acquire beneficial ownership in the company as an incentive to remain with the company and a reward for valuable service. For the business owner, an ESOP can provide a guaranteed, in-house market for the business. As an ESOP can be complex, it is best to consult with a team of experienced advisers before proceeding.
Often, a business owner will want to transfer the business to family members. It is critical to have a family succession plan in place to make this transition go smoothly. Among other things, the business owner will want to address how to treat those family members who are active in the business versus those that are not.
If the business owner might want to sell to partners or key employees, it is important to have a good buy-sell agreement in place. The buy-sell agreement can address the various contingencies for an owner’s exit from the business, including a voluntary sale, death and disability. The agreement can define the terms of the sale, including how to determine the sales price and any financing terms.
For some business owners, an outright sale to a competitor or other third party may be the best approach. The owner will want to take appropriate steps to maximize the value of the business before putting it on the market, and will also want professional help to market the business and evaluate offers.
The right option will depend on the nature of the business and the owner’s goals. It is important for the business owner to have a team of experienced advisers to help evaluate the different choices.