Exit Planning for Business Owners
Getting Yourself Ready for Retirement
Most business owners have at least a rudimentary business plan and a marketing plan, but shockingly few have exit plans. All of us will eventually have to exit one way or another. It can be a joyous occasion or it can be a messy one. A little bit of planning can tilt the outcome towards the joyous side.
There are actually two exit situations you need to prepare for. First, the situation where you are in complete control of most of what is going to happen. That is the one we are going to talk about today. You could also get into a situation where you have little or no control. Even in this situation, there are plenty of things you can do ahead of time to cushion the fall, but that will have to be a discussion for another day. Back to our planned exit strategy.
If you are like most of the people I have talked to, you are probably thinking this is about selling your business. It is, but using that as a starting point for your planning would be a mistake. You may end up with the perfect sale. You get everything you want, but what are you going to do with it? I think you should consider selling your business the end point, not the beginning. A better place to start is with you. What do you want your retirement life to look like? Figure out what you will be doing, how you will live. Will that work for your family as well?
There are at least three decisions you will have to make:
- When do you want to retire?
- What will retirement look like to you?
- Who will take over?
Therefore, the exit strategy begins with a retirement plan, first for yourself, then for your family and others who are important to you and who may be impacted. Every good retirement plan also includes an estate plan, the plan that goes into effect when you die. Who will take over is the last stop on that journey, not the first.
The retirement plan obviously includes how you plan to pay your bills. What kind of lifestyle do you want to have? What will you be doing? Will your spouse be on board with that?
The first question is relatively easy to answer. It is largely a matter of math and making decisions to achieve specific goals. The second could be a lot more challenging for some. If your business has been your main focus for the better part of a lifetime, it can be difficult to let go. How will you occupy yourself? You’re not going to play golf or sitting on the couch all day, are you? How will your family react to this new version of you? As you can see, there are lots of questions that need to be answered and as you find answers other questions will pop up. I think you will agree this does not come overnight. It takes time to think it through and experiment with different scenarios. There is no formula you can plug into. You’re going to have to do this yourself or better yet find a colleague or two who are in the same situation you are. There is some guidance you can get, though. You are not the first to have gone through this process and lots of people have shared their experiences. Learn from them. Read some books. There are plenty of literature on this subject. If that fails, hire a life coach who can help you weigh the options.
Three Decisions to Make
There are essentially three things you will need to do. You must extract yourself
- Financially and
from your business. The emotional extraction could be the hardest to achieve, but let us look at them one at a time.
Three Elements of your Exit
If you are a one-person operation, the case in clear, your business begins and ends with you. When you go on holiday, your business basically shuts down. Of course, there are ways to keep in touch with clients while you are away temporarily. When you retire, the business also ends. Value you can transfer to someone else is quite limited. Maybe you have a good client list. Maybe you have an attractive lease that can be assigned, but essentially when you stop, the business stops.
If you have employees, to what extent do you have processes in place to allow your business to carry on without you? Does that include a management team capable of making strategic decisions or are they limited to day-to-day operational decisions? Simply delegating tasks will do little to take you out of the loop. You will need to go at least one step further. Give them real responsibility with consequences.
Extracting yourself physically is also a great help should you get injured or in some other way unable to perform your daily duties. It is not only a good retirement decision to make, it is also a good business decision to make.
It is not uncommon to find small businesses where the economy of the business and of the family is so entangled that one cannot be distinguished from the other. Of course, this is problematic for many reasons, but especially when you need to transfer the business to someone else.
It is tempting to pour all your resources into growing your business. You may find that everything you have is sewed up in the business and you have few assets outside the business. For retirement purposes, it is essential to divert at least some of your assets towards retirement. There are many choices and one or more will meet your needs. The main thing is to get started early and do it often. Even small amounts invested frequently over a really long time can mean significant wealth in retirement, perhaps the difference between struggling and being comfortable.
As mentioned earlier, figuring out what you’re going to do with your life post-retirement could be the hardest task you will have to do. Starting early is important. Begin with extracting yourself physically from your business, take time off, do something else for a while. It may take some time and some tries, but it is vitally important to get this right. It could mean the difference between misery and joy.
Retirement could look like this to you, but is that what you really want?
Whatever you do, try to get started thinking about these things as early as possible. The second day you’re in business seems like a good choice. Set your target date and adjust everything else to meet that goal.
Selling Your Business
As I mentioned above, deciding who will take over should be the end point of your plan. Ask a number of business owners who they want to take over and they will almost invariably tell you that they want to sell to a third-party. Reality is that only about one in five actually do, so it is wise to think about alternatives. Alternatives could be a family member or one or more of your managers. Do not overlook the possibility of selling to your employees as well. They may actually be your best buyers. They have more at stake than anyone else. There are many benefits and there are several ways to do this. I have discussed these options in more detail in a previously published article so I am not going to do that here.