As a small business owner, you often wear many hats for your business. Because of this, making sure your business is prepared for your exit can seem overwhelming. While many owners will plan to sell their business and use the funds to pay for retirement, many have also transitioned to retirement or other projects and lived happily ever after while their business continues on. No matter which small business owner exit strategy you follow (selling, gifting to a family member, or closing up shop), here are some items to consider before exiting to make sure that the transition is smooth and sustainable.
SMALL BUSINESS OWNER EXIT STRATEGY: SELLING YOUR BUSINESS
The first order of business is understanding your reason for selling. Some business owners want to sell their business in order to start a new venture or retire. Others are simply burned out or had always planned on selling. If selling is your whole retirement plan, there are many sources that would urge you to consider the following points before moving forward.
FIGURE OUT HOW MUCH YOUR BUSINESS IS WORTH
First of all, evaluate if you have something that will be profitable to someone else if they buy it. Do your market research and take a look at how similar businesses are doing. Is there a future in the market for the business you’ve got? If so, consider how much your business is really worth. One way to do this is to tally up the value of all your business assets and then subtract your liabilities. The result will be a good look at how much your business is worth at face value. However, there are other considerations such as revenue, earnings, and even location that factor into your business’s worth.
A broker can help you figure out your business’s worth based on your sales. Having a broker throughout the entire process is a typical practice especially when selling to an outside party you don’t already have an established relationship with. Ultimately, you may want to get a professional valuation. While you can estimate the price yourself or go through a broker, having a professional valuation creates credibility for your asking price and ensures you are within the right range.
PREPARE YOUR BUSINESS IN ADVANCE
You’ll want to start preparing your business at least a couple of years ahead of time. As with selling a house, you’ll want to “tidy up” your business before bringing potential buyers in. Clean up your financials including taking care of as much remaining debt or liabilities as you can. Also get all of your legal documents and financial statements in order and prepare an information packet that you can present to potential buyers.
You will also want to prepare your customer base for the transition. Reassure key customers that they will continue to receive the same service and pricing under the new ownership so that they don’t head for the door. Or, if pricing and services are going to change, you will want to prepare them for this too. Ensure that your business structure is solid with up-to-date operations and employee handbooks. Finally, begin prepping employees who will be able to succeed you in management. You will also want to provide attractive incentives for top employees to stay on under the new ownership, especially if there are one or two superstar employees who bring in most of the revenue. It can take up to a few years to close the sale once you’ve identified potential buyers. However, the more prepared your business is for a sale, the smoother the transition can be.
IDENTIFY BUYERS AND CREATE A SELLER’S PLAN
Potential buyers may include family members, business partners, employees, third party investors, or being acquired by a larger company. Especially when dealing with buyers from the outside, you will want to have interest from two or three potential buyers in case something falls through. The next thing you can do is create a seller’s plan with the help of your accountant or lawyer. There are several different types of sales. The two we will cover here are the asset sale and the share sale, also known as an entity sale.
An asset sale is where you sell off the assets of the business. After individual appraisal, the total cost of the assets will be your selling price. You have the right to retain any assets you do not want to sell. If you are set up as a sole proprietor, an asset sale is the only selling option you have. You also still retain the liabilities of the business when you are the seller in an asset sale. This can be adjusted using a lawyer but, in general, an asset sale is riskier for the business owner while being incorporated gives you the more favorable option of a share sale.
In a share sell or entity sale, your corporate stock and membership interests are sold to the buyer. The assets remain intact with the business that is handed over. There are different tax obligations associated with these transactions and also with whether you are incorporated or not. Be sure to do your homework before committing to any particular type of sale. The U.S. Small Business Administration has a helpful training guide on selling your business that you can review here. There are many more iterations on ways to exit your company through a sale than those discussed within the parameters of this article. Find out more here and here.
SMALL BUSINESS OWNER EXIT STRATEGY: TRANSFERRING YOUR BUSINESS TO A FAMILY MEMBER
If you know that you do not want to sell your business, you will want to start saving for retirement now using other strategies. For business owners who do not want to sell the company, a common desire is to pass the business on to a family member. Sometimes selling to a family member is the preferable option–there are financing strategies such as a partial sale that you can use to help it be a viable financial option for family. However, you can also gift your business to your successor. In the US, the gift tax does not come into play until the value of the gift is $5.45 million. If your business comes in under this, you could avoid paying gift taxes altogether. You can also give your business to family in $15,000 segments to avoid gift taxes in the long-run. If you have retirement savings from a diverse portfolio, then gifting to a family member could be a great way to ensure the growth of the business you helped build while also maintaining some involvement.
SUCCESSION PLAN AND FAMILY INVOLVEMENT
There are some challenges accompanying this plan including family rivalry, changing market environment, and diverse interests held by the up-and-coming protégés. In order to achieve a successful transition, ensure that a shared family vision is in order to avoid in-fighting and the potential lawsuits that could follow.
One Harvard Business Review article from this year suggests revisiting the business and succession plan as family dynamics change and members express interest in moving away from the business or perhaps getting even more involved. Having an open dialogue is essential to avoiding miscommunication later on. This can also help identify where family members might be able to step into additional roles that more fully align with their developing skills and interests. By allowing for these natural developments to be part of the succession plan rather than relying on set-in-stone decisions made early on, it is likely that the right people will be put into the right positions as the new owner(s) come into their responsibilities. The article also suggests looking to other business families for advice on how to achieve a successful hand-off. Outside perspectives can provide insights for your own challenges.
Transferring the reigns over or giving the business as a gift to a family member often requires negotiating relationships which can be even more complicated than putting together a sale. Once you have worked through these challenges and chosen your successor, you will want to be prepared to intensively mentor them for a few years beforehand, showing them the nuances of business operations, increasingly handing over responsibilities and decision-making power.
KEEPING ONE FOOT IN THE DOOR
Instead of completely stepping away, you may half-retire instead and just take an advisory position in the backseat. This is one advantage to a family succession plan—you are still able to be involved in the business as much as you want to be. However, be careful that your continued presence does not undermine the new leader’s power. If you do become a consultant or advisor to the business, be conscientious of how it is affecting company dynamics. Something that can help with this is having the responsibilities of your new role in writing and sticking to this agreement.
Keeping one foot in the door also opens up the opportunity to continue collecting income from the business even if you are no longer the owner. For example, if you own some of the assets used by the business, you can now lease them out and profit without being involved in operations.
SMALL BUSINESS OWNER EXIT STRATEGY: CLOSING YOUR BUSINESS
It would be hard to find a business owner who consciously plans to close their doors someday. However, if your business has fallen on hard times and you do have to close down, you may still be able to walk away with a little profit. Always consult the IRS website for information on restrictions or requirements that are associated with your business filing and closing down. If you are an incorporated business, consult with your accountant, lawyer, and any other co-owners to make sure everyone is in agreement and ready to proceed. You will want to make sure all of the legal necessities are in order so you don’t end up unintentionally paying more taxes than you need to.
Without any buyers, mergers, or successors, liquidating your assets might be the only viable way to generate a profit in the end. If a business is closing, it may become necessary to use the profits from selling these assets to pay off any debts that still remain. You can use various websites to sell your assets. There are even industry-specific websites that specialize in selling construction equipment, high-tech tools, and more. Prepare to get no more than 80% of your asset’s value when you sell. If you are having to file for bankruptcy, there are even more requirements you will need to keep up on. They can be found on the IRS website here.
While each of these transitions—selling, succession, and closure—are emotionally challenging, shutting down can be the most painful of all. Many former business owners struggle with feelings of failure. Getting through the accompanying grief can be difficult. Take time to mourn the loss of your business and rediscover your interests and identity surrounded by supportive friends and family. During this process, do not miss the opportunity to evaluate what went wrong and learn from it as you move forward. When a business is forced to close, there are usually creditors knocking on your door and you need to start bringing in income again quickly. A good place to start is reaching out to your personal and professional networks. After working steadily and recouping your losses, you can prepare for your next venture.
Ultimately, every business and business owner is unique. There is a myriad of factors that play into which small business owner exit strategy you will want to choose. The bottom line is that the earlier you start preparing to sell or transfer your business, the less likely you will end up in a situation that requires you to close your doors. While market forces can be unpredictable, you can still give yourself the best opportunity at a smooth exit by starting to plan now.
