Approximately 75% of business owners are expected to transition out of their businesses in the next 10 years. Eighty to ninety percent of business owners have most of their wealth tied up in their businesses. Even with a large amount of their wealth concentrated in a single place, 83% of business owners have no written transition plan and 49% of business owners have done no exit planning. With all the businesses for sale in the United States, only about 20% result in a successful sale.
So how do business owners increase the chance for successfully transitioning their business and get the value they built in their business? Advance planning is important. It is never too early to start thinking about an exit, whether a business owner is starting out, growing, or nearing retirement. Below are 4 reasons to start working toward an exit plan today.
1. Prepare for a Forced Exit. Certain unforeseen events such as death, disability, divorce, distress and disagreement, can require a business owner to exit. While these events are often unexpected, a business owner can consider such scenarios in advance to put together an exit plan should one of the above occur. By having a plan in place, business owners will know they will have adequate resources personally and within the business should a forced exit be necessary.
2. Maximize Company Value. Whether selling a business is part of an owner’s short-term or long-term plan, owners should develop an exit plan now to work on implementing the steps necessary to achieve an owner’s exit strategy. For example, if your plan is to sell in 5 years and you would like to receive a specific purchase price, you should be working with advisors to take steps to reach that exit strategy. By developing a plan early and implementing such plan, business owners can increase the value of their companies to ensure a more successful exit or sale.
3. Mitigating Risk. Business owners can work with advisors such as merger and acquisition attorneys or advisors to develop a plan that allows for reducing the risk and increasing the sale proceeds in a transition. For example, if the strategy is to sell to a third party, the business owner may want to work on cleaning up any skeletons in the closet such as settling outstanding litigation, cleaning up the balance sheet, buying out minority shareholders or updating old equipment.
4. Prepare for Retirement. Much of the focus of exit planning or planning for a sale can be focused around the company, but equally as important are the goals and next chapter for the business owner. Once the company is sold, what does the business owner need to be comfortable in retirement? What will the business owner day-to-day activities look after an exit? Working with advisors to plan for this next chapter will affect the goals upon a sale.