Are There Advantages to Developing An Exit Plan To leave Your Business? Absolutely. Learn What They Are!
Who Is Going to Run Your Business After You Are Gone? Planning Your Exit
There is at least one universal truth in business life: One day you will leave your business.The goal of this article is to help business owners recognize the role of effective planning to ensure that their exit is a successful one. For as much calculating thought as people put into running and building successful businesses, a surprising number don't think much about who is going to run their business after they are gone. But you do plan, you say.True.You plan day to day operations.You create production or service schedules, devise marketing strategies, plot sales efforts, compile projections, and generate organization plans. But traditional day to day business planning is not the only kind of planning that business owners must do for themselves - they must also create their Exit Plan. Unlike day to day business planning which is done at the business level, Exit Planning is done at the ownership level and is not based on business needs as much as the owner's personal goals.
Developing Your Exit Plan
What exactly is an Exit Plan that will allow you to leave your business in style and how do you create it?Since there is almost an infinite variety of businesses and business owners, each owner's plan will certainly vary, but almost all plans contain certain elements. To give you an idea of where you stand with an Exit Plan, take the following quiz.If you are like the vast majority of business owners, these questions will highlight areas that need attention.Most business owners haven't asked themselves how much money they might need in order to retire or under what terms they would sell.If they plan to sell, will the buyer be a relative, an employee or someone outside the picture? Take the quiz now:
1.Do you know your primary planning objectives in leaving the business, such as: a.Departure date? b.Income needed to achieve financial security? c.Who will succeed you?
2.Do you know how much your business is worth? (Not what price you would sell it for, but what price someone would pay for it).
3.Do you know how to increase the value of your ownership interest through enhancing the most valuable asset of the company - the employees?
4.Do you know the best way to sell your business to a third party which maximizes your cash, minimizes your tax liability and reduces your risk?
5.Do you know how to transfer your business to family members, co-owners or employees while paying the least possible taxes and enjoying maximum financial security?
6.Have you implemented all necessary steps to ensure that the business continues if you don't?
7.Have you provided for your family's security and continuity if you die or become incapacitated? If you are like most business owners, you will only be able to answer "yes" to a few of these questions.If you are going to successfully exit your business, you must be able to say "yes" to each and every one.But getting to "yes" for each question takes thought, planning and, in most cases, time.It also requires a team of advisors; your accountant, your financial planner and your estate planning attorney.
I Thought My Daughter Would Take Over
Many business owners mistakenly fall into a common trap of assuming one of their children will step in and carry on the family business.But let's face it - sometimes our kids think our jobs are boring and want no part of it. For example, David is an optometrist and wants to retire soon and regularly prods his adult daughter to take over managing his successful practice of three offices.He wants to hire another eye doctor to service patients and to receive income from his business during his retirement. However, his daughter has never expressed any interest in running the business.She has a graduate degree in literature and enjoys teaching.Eventually David, who is in his early 70's, will have to stop working.Without proper planning and forethought, he will be forced to sellhis practice for less than it's worth, or shut it down and miss out on any retirement income because he didn't do any reasonable succession planning.
Nobody Wants a Family Feud
On the flip side, more than one child might want to take over a parent's business and the subsequent conflict could tear the family apart. For example: Tim ran a successful manufacturing company.After he died, he left the business to his wife, Sue, with a small percentage of shares also left to each of their three children.Sue was ready to retire.Their oldest child, Rick, has worked in the business since college and has managed it alongside his mother since his father's death.Rick wants to buy out his two sisters so he can run the business on his own.While she has never managed any part of the business, his sister Kelly decides she wants to do the same thing.Unfortunately, they haveno desire to run it together and Kelly refuses to sell her shares for less than a grossly inflated price. Sue wants to keep the business in the family but she has been unable to broker a decision that either side sees as fair.A legal battle is looming.
Don’t Put It Off, Do It Now
In both of the examples I have shared, we have a father putting off succession planning to his own financial detriment, and a mother too afraid of hurting anyone's feelings to make a decision that's best for the business. Both situations could have been avoided with proper planning. Every journey begins with the first step.The first step to create an Exit Plan is for the business owner to identify an advisor that has experience in this area and set up an appointment for an initial conference to discuss their process for creating an Exit Plan and what the costs may be.Discuss the quiz outlined earlier in this article as well.This needs to be done well before the owner wants to retire as many situations require significant lead time to develop properly.If the owner doesn't start to make important choices as soon as possible, or at least in conjunction with their own family estate planning, unexpected and very preventable situations can occur._____________________________________________________________________________
Richard Sayer is the head of the Business Law and Estate Planning groups at Sayer Regan & Thayer, LLP which is located at 130 Bellevue Avenue in Newport.He can be reached at 849-3040 or by email: RSayer @srt-law.com.