Business plans – every small business owner should have one. Most don’t, but at least they know they ought to. As for an exit plan, most don’t know that they’re supposed to have one. The closest they come to having a plan is really just a hope and a wish. An idea without a strategy isn’t a plan; it’s a dream.
A true exit plan consists of a long term strategy for how the owner will extract value from the company, while transferring ownership to others. It establishes priorities and sets out concrete steps, which end with him getting a reasonable return on his hard work, sacrifice and investment.
Here are 3 exit dreams that the typical owner has.
Sell to an outside interest
Small business owners are notorious for over valuing their companies. Their method for establishing worth is simple – they guess. It’s rarely based in reality and they get a nasty surprise when no buyer, broker or bank agrees with their valuation.
A typical exit plan should start years before the actual sale. The end goal, positioning the company to be attractive to a buyer, can be accomplished in many ways. How you want it to end will dictate what you need to do to get there.
For example, if you want to make a big profit at the end, you might focus on building the company and reinvesting most of the profits in growth. Or you may prefer to sell for a more modest profit, which might mean growing slower and taking more of your profits out as income.
Pass it on to a family member
According to the Small Business Administration (2013), 88% of family business owners would like their companies to stay in the family. But, only about 30% survive in the second generation and 12% in the third. The number one reason family businesses don’t survive into later generations is the lack of an exit plan.
Planning for succession can be the most difficult challenge owners’ face. Therefore, to the determent of the company and their family, most just avoid it. Their belief that “it’ll all work out” is usually wrong – avoidance isn’t an effective strategy and it seldom works. A successful plan is begun years in advance of retirement.
The plan creates a blueprint to sustain future generations. It should address 3 main areas: operational leadership/management, financial/wealth and family issues/interpersonal. Each section is equally important and may require outside professionals to help navigate through them, as family matters can be particularly volatile.
Sell to an inside interest
Some of the messier exits are those that involve selling to a partner or an employee(s). Many of the “contracts” are hand-shake deals, which can quickly become “You said. I did not” conflicts. Also, they often happen without proper timelines or guidelines for the transition.
An owner must be particularly cautious in this situation. In lieu of a careful plan many partners and employees take over duties they have no training for and are ill suited to. The stories of owners coming out of retirement to try and save the company (and his money) when it’s been run into the ground are legend.
The exit plan should be well thought out and implemented in a prearranged, orderly manner. It ought to provide legal coverage for all parties, clearly spell out the financial requirements, have concrete dates for transitions (the stories of owners never leaving are also legend) and ample opportunity for training.
A word to the wise – don’t blow it at the end. You’ve worked too long to end up getting poor value for all your hard work. Don’t be one of those people who go out with a whimper rather than a bang.
At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:
