Nearly 75% of entrepreneurs will exit their businesses in 10 years.
Small business owners dedicate most of their life to their business. In many ways, it’s like their baby. They put all their savings and energy into it for years on end so it can thrive and truly succeed. They experience their share of ups and downs, but press ahead because they believe in the business and want it to grow.
But what happens when it comes time to hand over their business and let someone else take care of what they built with their sweat and tears? Doing so means accepting that they no longer make key decisions for its future. So, while they are still in the driver seat, what are some of the key financial and non-financial challenges they should be thinking about and planning ahead for?
1.Wealth preservation – Because the business owner’s wealth is concentrated on one company, business owner needs to think about the lifestyle he desires to have after exit through preserving wealth. A business owner should run an analysis on cash flows needed after exit in order to maintain current lifestyle to determine the amount of proceeds to be received when the business is sold.
2. Tax mitigation – this should be part of a strategy in exit planning since it will have a big impact on the amount of proceeds ultimately enjoyed by the business owner. A business owner looking to sell their business should consult tax professionals when planning for exit to minimize tax impact and maximize after tax cash flows.
3. Asset protection – after the business is sold, a business owner is on the radar and more exposed to a lot of people and could lead to potential frivolous litigations. Business owners need to work with professionals who can help them protect the cash flows in order to preserve wealth after exit.
4. Wealth transfer – A business owner needs to think about how to ultimately get the proceeds to family. This will be part of the estate planning process that is crucial for same or next generation wealth transfer.
5. Charitable intent – Most business owners want to fill the void that is left behind after selling their businesses and they often turn to philanthropy effort to make a difference in their communities.
How soon should a business owner start preparing to sell his business?
1.Time frame for exit planning – if you ask M&A professionals and business brokers, they would tell you yesterday is the perfect timing! Business owners who are heavy on operating the business often complain that they have no time to plan. With the strong market that we have currently, business owners could expect to sell their business in six months if they are willing to move quickly and aggressively towards their end goals. However, for proper planning for the challenges lie ahead – like the ones described – the recommended time frame is two to three years prior to exit to allow sufficient time to get personal affairs and business planning in order. Business owners often underestimate the amount of details that potential buyers will want to look at. Therefore, properly planning for exit will allow a business owner to focus on preparing for the potential buyers’ request for information. If you fail to plan, that often means you plan to fail.
2. Maximizing value – CPAs should advice clients reading for a liquidity event to get their financial statements in tip top shape; perhaps there has been some personal expenses running through the business that can be cleaned up or avoided? clean financials; what should we do now to get financials in order to achieve max value; what expenses are driving in the business now that shouldn’t be driving right now if we are planning for exit; how close can we get to accrual/GAAP basis?;
Other nonfinancial concerns
1.Filling that void after the exit – having your own business is very consuming of your life and it becomes a big part of you and your life. After a business owner sells his business, there is often a void, and something needs to fill that void since the life purpose isn’t there anymore. Business owners need to think about what they would like to do when they are no longer working and find new purpose in life.
2. Coordinate (quarterback) the process – A good advisor should be gathering a team to help a business owner build an exit strategy, and coordinating everything from A to Z. A good quarterback does not have to be an expert on taxes, financial reporting, estate planning, and business planning, all at the same time. Rather, a good quarterback must be a great communicator and be able to understand the emotions a business owner is going through during the process, and to pull together a team of other experts who have the best interest of the business interest at heart. CPAs typically have a knack in understanding the capabilities of other professionals. They are typically conservative and level-headed, and often compliment the high energy of business owners.
Do you have an advisor you can count on when you are ready to move to the next stage of your life?