Business advisors often recommend owners to begin business exit planning before they start operating. According to the Exit Planning Institute, “A business dependent on the owner will never reach its full potential value because most of the value in the business is locked in the owner.”
Having a strong business exit strategy is an important way to increase the value and success of your business. Although retirement and exit may be a long way off, understanding what will happen to your business when you retire is a critical part of ongoing business operations. It will help you to plan for a strong succession and steward your assets and wealth.
Understanding Business Exit Planning
According to Steve Jackson, a financial advisor and member of the Exit Planning Institute, “An effective plan sets personal goals for the owner.” Many of these goals are financial, but exit plans should also include succession planning, ways to increase business value, tax and legal considerations, and contingency plans that address potential unforeseen events.
Another potential benefit of business exit planning is a way for owners to better identify and understand their personal purpose. Exit planning can help owners to live a more meaningful life, and also plan to have a fulfilling life after they exit their business. In this way, owners can optimize their lives and explore their passions, as well as devote more time to family and friends.
The Importance of Early Exit Planning
Planning for your business exit early on is crucial for a number of reasons. An early exit plan not only helps you navigate the complexities of business transitions but also ensures that your business thrives even after you’re gone. By prioritizing exit planning from the start, you create a roadmap that enhances the value of your business, builds a solid reputation, and sets the stage for a seamless and profitable exit. Whether you’re planning to sell your business or pass it on to the next generation, having a well-thought-out exit strategy can make all the difference in achieving your long-term goals and securing the legacy of your business.
Early exit planning also helps to significantly enhance your business’ value. Establishing an exit plan early in your business ownership journey also strengthens your business reputation. If you intend to exit by selling your business, an early start on your exit plan will prepare your business for sale at the optimal price and time.
According to the U.S. Chamber of Commerce, many owners wait until they’re ready to leave before establishing a business exit plan. This approach automatically limits their exit options.
Additional benefits of starting exit planning early include:
- Having a strong direction for your business decisions
- Ability to set strong goals and achieve them
- Remaining committed to measurable, quantifiable business value
- Making your business more attractive to potential buyers
- Guaranteeing a strong transition after you leave
- Achieving personal goals after you leave
The U.S. Chamber of Commerce also says that leaving a business can be overwhelming. Starting the exit planning process early helps to mitigate problems that can occur if exits are sudden and unplanned.
Steps For Developing Your Exit Plan
There are several steps that are common to planning exit strategies. They include:
- Step 1: Gather documentation, including financial statements, employee information, legal documents such as articles of incorporation, and contracts.
- Step 2: Organize your legal and financial team to help guide you through the process.
- Step 3: Consider your exit options
- Step 4: Choose new leadership
- Step 5: Establish plans to repay investors or lenders.
- Step 6: Establish a communications plan for employees and customers for use when exit comes.
Consulting with a qualified and experienced CPA can help you to follow each of these steps and execute a strong business exit plan.
Common Options for Small and Medium-Sized Businesses
You may see some guidelines listing IPOs (Initial Public Offerings) on the stock market and ESOPs (Employee Stock Option Plans) as exit plans. While this is not a likely strategy for a small or medium-sized business, merger and acquisition (M&A) by a larger company is.
Other common ways to exit your business include:
- Selling to new owners: When you want to sell your business to new owners, you’ll want to consider not only a strong valuation strategy but also building your business reputation and increasing its value and marketability.
- Management buyout: Some businesses are able to build up their management team to the point that the team will become qualified new owners. They can then sell the business to their own management when it comes time to exit.
- Planned liquidation and closure: For some businesses, planning ahead of time to close can make sense. Liquidating and closing your business completely can have tax and other advantages.
[While this is not a likely strategy for a small or medium-sized business, merger and acquisition (M&A) by a larger company is, including private equity.]
How a CPA Can Help You Navigate Your Exit Strategy
Many of the steps involved in business exit planning are steps that qualified CPAs are well-prepared to help you organize. For example, you’ll need to ensure your financial statements are thoroughly prepared and establish a process for issuing and analyzing them. CPAs can also help you assess your business health and identify the stakeholders you’ll need to take into consideration as you plan your business exit. In addition, business exits always have tax and estate implications.
You can also benefit from a CPA providing you with general business advisory services. Managing your business on a weekly, monthly, and quarterly basis will help your business to grow and to maintain its value.
Preparing Financially for Your Business Exit
When it comes time to exit, you will want to show a strong balance sheet and a history of profitability. Your assets and liabilities will play a crucial role in this process.
Even if you plan to liquidate your assets and close the business entirely, you will want to know your optimal tax, asset, and retirement situation. Of course, this is another important reason to establish your business exit strategy as early as possible.
DHJJ is Here to Help
Even if you are approaching retirement and considering selling your business, it is never too late to complete exit planning. DHJJ is experienced in business exit strategy in many different business sectors, from restaurants to real estate, manufacturing, construction, healthcare and dental care, and more. Contact DHJJ today to begin your exit planning process.
