Do You Have an Exit Plan in Place for Your Business?

Exit planning is something that all business owners will have to face at some point.  Like being the executor of an estate, it is usually thrust upon someone once in their lifetime.  They initially have no knowledge of how to sell, will only learn while doing it, and will likely never use that experience again.

Recent studies show that 66% of the current American business market is owned by Baby Boomers, who are set to transition into retirement over the next ten years. 49% do not have any type of exit plan in place, and 34% “have” a plan but it has not been communicated or documented.¹  An owner who is “ready” with an attractive business greatly increases the odds that the business will survive a transition of hands.

Every business transaction is different, and it is difficult to know exactly how long it will take to fully carry out an exit strategy.  Smaller businesses with EBITDA at less than $2M generally sell through a business broker. A recent survey from BizBuySell found that 54% of brokers saw businesses from 2007-2016 sell in 6-11 months.² While a 9-month average is a good overall estimate, your industry, financial performance, location, current economic conditions and type of transition plan will all play major roles in the time it takes to close an acquisition. Understanding all of these elements will be essential in taking the right steps to ensure a smooth transition when you plan to hand over the reins.

Selling Options:

For our clients who are business owners, they too will have to deal with this once in their lifetime- and it is stressful!  It is hard to think of one business owner that has not struggled with this.  The options on how to hand over, or sell a business are endless, but generally they fall in a few buckets under two basic categories of sales types; internal and external:

Internal Sale:

• Internal successor or management team.
• Employee Stock Ownership Plan (ESOP)- A tax advantaged, yet administratively tedious way of implementing a sale to your employees.
• Management Buyout: This looks great on paper but is tough to effectuate. A team member would require not only the requisite knowledge, but also the desire to become a business owner.

External Sale:

• Sale to outside party.

There are a few constants across all transactions that business owners should consider:

1. The value of your business has nothing to do with how much you “need” in retirement. While it may impact how long you need to continue running the company, a potential purchaser of your business doesn’t care if you need $1m, $3m, or $5m to retire.
2. There is no set value of your business. Most business owners think their business is worth more than it is.
3. Unlike most transactions we conduct in life, a business purchase/sale is infinitely more complicated, there are no “standard terms”.
4. It will take you twice as long as you think to conduct a transaction.

At Beacon Hill, we encourage our clients to plan early with different exit strategies in mind. Selling a small business is a complex venture that involves many considerations. Thinking about your succession plan early on will allow you to get the most out of your business, whether you sell it, pass it on to your family, or have someone else manage it for you.

Next month, we will have a more in-depth conversation about Employee Stock Ownership Plans (ESOPs), which are a way for a retiring business owner to sell their operation to their employees, and a great way for the retiring business owner to minimize their tax burden.

¹Cooper, Chris. 2013 Northeast Ohio Chapter of the Exit Planning Institute, State of Owner Readiness Survey. Survey. Retrieved from Exit Planning Institute: http://exit-planning-institute.org/state-of-owner-readiness/

²BizBuySell.com (2015, June 26). Survey Reveals Gap Between Small Business Owner Expectations, Actual Selling Process. Survey. Retrieved from BizBuySell: https://www.bizbuysell.com/news/article111.html?isncms=1 CoStar Group, Inc.