Exit strategy-planning for it now

After many years of building and maintaining a successful small business, Julie Cavanaugh, age 58, wanted to sell her business and retire to a leisurely life.

By Joanne B. Sheridan, Senior Consultant, ZurMuehlen & Co. in Western Business News

However, when she looked for possible buyers, she found a limited number of potential buyers interested in purchasing a business in Billings, Montana, and even fewer that possessed the financial ability to complete such a purchase. Looking within her company, there was no one to buy it from her because–like most small business owners–she was the only one in the company who knew how to manage and run the operations. Julie was looking straight into the mouth of an owner’s worst retirement situation: liquidation.

Even though 95 percent of business owners want to transfer their businesses to family members, key employees or other co-owners, only about 50 percent actually end up doing so, principally because children, key employees and co-owners do not have sufficient money, and there is no successful exit strategy in place. Every owner will eventually leave his/her own business–either planned or unplanned. Exit planning can help you maximize the value of your business and convert that value into cash.

Effective exit strategy involves developing a plan for passing on responsibility for running the company, transferring ownership, and extracting the money. Since a stable business is worth more than an unstable one, creating a seamless transition is essential to maximize the worth of your business. Exit planning should be done while the company is in good economic health. Knowing the answer to such questions as how much money you will need when you retire, what is the current value of your business, how can you increase its value and convert it into cash, and what effective mechanisms are available to transfer the business are important in the planning process.

Your business is generally your most valuable asset, what you consider your retirement ticket. It is important to know its value to see whether you have enough money to meet your financial objectives. This value will help you decide your future course of action. Remember that the "value" of the business can depend on who is valuing it. Using a credentialed valuation analysis is your best bet for an objective and accurate appraisal.

Obviously, if you are selling to outsiders, you are interested in getting as much as possible for the business. Key value drivers include cash flows, effective operating systems, sustainability of earnings, leverage position, diversification of client/customer base, solid management team, and modern facilities. Build value in your business by having a management succession plan, developing the required systems, grooming a successor, and implementing an effective exit plan.

If you plan to transfer your business to co-owners, employees, or family members, you want to consider ways to minimize income tax consequences through the use of installment notes, deferred compensation, royalty or licensing fees, and/or leasing obligations between you and the business.

During the transition period, you should try to maximize your security through requiring personal guarantees by the buyer of both business and personal assets, postponing giving up controlling interest until the financial security of the firm is assured, and staying involved until you are satisfied that the cash flow will continue.

If you plan to transfer to a family member, you may want to consider transferring interest throughout your lifetime by using mechanisms such as family limited partnerships (FLPs), which facilitate transferring high growth/high income assets. Based on current tax regulations, FLPs allow the use of favorable discounts for lack of control and lack of marketability when gifting minority interests in the entity.

Last, but not least, when selling avoid these common business pitfalls:

# Not minding the store during the process

# Using an unfocused effort or shotgun approach

# Worrying about what the other guy got

# Running off with the first bidder or the highest bidder

# Leaking information

# Surprising the buyer by withholding the bad news

# Rushing to market before being prepared

According to a recent study, several trillion dollars are now held in privately owned businesses. The average age of the business owner is in the late 50s, and these business owners are thinking about retiring. This translates into $23 trillion changing hands in the next decade. If you aren’t ready for transferring your business, you need to start now!

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