As a small business owner, you’ve poured blood, sweat and tears into your company. You’ve spent countless hours strategizing, building, growing, brainstorming, and navigating the ups and downs of entrepreneurship. But when the time comes for you to prepare for the next stage of your life, knowing where to begin can often be the hardest part.
I’ve dedicated my career to helping small business owners navigate their exits because of my father. Originally from Poland, he came to this country with nothing and built a small garment business. Due to unforeseen circumstances, he was forced to liquidate his company. I was young when it happened, but I saw the impact the liquidation had on my entire family, especially my dad. The business he was so passionate about was gone in the blink of an eye, with not much left to show for it. Since then, I have poured my soul into helping more than 100 small business owners and families just like you plan for their exit.
Regardless of what your goal is or what you’re considering for your next phase, the best piece of advice I can give you is to start early and make a plan. A recent survey conducted by PriceWaterhouseCoopers showed that 12 months after selling, three out of four business owners who had previously exited, “profoundly regretted” their decision. This is the cost of poor preparation. Whether you’re anticipating retirement or your next project, these four steps will help prepare you for your exit and ensure your legacy lasts for generations to come.
Evaluate exit options
There are many different exit options ranging from liquidation to an initial public offering (IPO) and everything in between. As is true with all scenarios, there are pros and cons for every avenue. Ask yourself what your goals are, and take these options into consideration:
- Selling to your employees is a good option for a certain style of company.. One option is an employee stock ownership (ESOP) .This is when the owner sells the company to his employees. For this to work the company would need very good cash flow. There are excellent tax reasons to do this but a few hoops that you have to jump through. You can sell the company to one or a few employees that you believe will continue the business in a thoughtful and careful manner. This is a good option for business owners that still want to be involved in the business before their next opportunity.
- Keeping the business in your family is always a great option for those that have children or relatives that are interested in continuing the family business. There are challenges with this, as most family businesses don’t last more than three generations. In fact, 30% of family businesses make it to the second generation and a mere 13% make it to the third. This can also be an emotional option, putting potential strains on your family.
- A merger or acquisition means you can sell your business or have it acquired by a competitor or similar company. This option will enable you to negotiate the price of the sale, but a lot of different factors affect a successful merger. The acquiring company will want to ensure that everything from company culture, employees, offerings, processes, technology and clients align with theirs, making this a time consuming and potentially costly process.
- Going public with an IPO can earn you a substantial profit, but the process is also extremely difficult, time consuming and expensive. While 2020 was the biggest IPO year yet, with a total of 480 IPOs, keep in mind that it can often take some time before the company becomes profitable. More than 60% of 7,000+ IPOs from 1975 to 2011 had negative returns after five years in the secondary market.
- Liquidation may be the best option for you if you are ready to close your business forever. This is an extremely fast and simple process, however it becomes harder to preserve a legacy since this is one of the least profitable options. While liquidation isn’t right for everyone, it can certainly be a good option for anyone who is ready for an easy way to cut ties with the business they built or inherited.
Regardless of what you believe to be the best option for you, an analysis by a professional is imperative to help determine the right course of action, as well as navigate you through the process.
Consider tax planning
Selling your business as an entity or an asset sale can make a huge tax difference. In addition, there are methods such as installment sales that could potentially extend when you owe your taxes. Gifting shares is another strategy to consider, as any illiquid gifts can potentially be considered being gifted at a discount. You will need to prepare for these options well before you sign on the dotted line, so it’s important to speak with a professional you trust before you do anything. Any good exit planner will have existing relationships with accountants and estate planners who can help you navigate the process.
Create a plan
Once you have identified your preferred strategy, it’s time to determine the value of your business. A professional can help you calculate a general estimate of the fair market value while also understanding Key Performance Indicators (KPIs) that impact valuation. There are different factors to consider when evaluating your business, including different strategies to increase your valuation depending on your current circumstances.
When considering timing, I guide my clients to begin with the end in mind. Think about where you want to end up, and then work backwards from there. Three years provides you with plenty of time to create an excellent plan, but a minimum of one year is necessary for maximum results. Once you have the end in mind, your exit planner will work with you to develop a comprehensive and strategic roadmap to transition away from the business.
Build your legacy
Now that you’ve sold your business, you can ride off into the sunset or head into your next venture. Regardless of what’s next, one thing is certain: it’s important to develop a customized investment strategy to replace your business income while also maximizing your giving. You’ve worked so hard to build your wealth, and now is the time to ensure it lasts for the generations to come. I have seen many business owners, similar to my father, lose out on building their legacy by not monetizing their business. There are many different options, including wealth transfers, estate planning strategies, endowments, private foundations, charitable funds and trusts, and nonprofits. It’s important to think about what is the purpose of the money and what you want to do with it. Some business owners create their own foundations, and others are more comfortable donating their funds to an existing charitable organization that they are passionate about. The business itself, which may be named after you or has a special meaning, could also be your legacy.
Like most changes, exiting a business can feel overwhelming. You quickly go from having full days and an income stream to not knowing what to do with your time or where your next paycheck will come from. Both can feel jarring, and without proper planning and strategizing, it can feel like a big life change. Think about what you enjoy doing and how you want to spend your time. If you could do anything, what would that be? Spend time with friends and family, volunteer, or consider consulting to keep you busy and earn a little extra income. While it may seem like the end, it’s also just the beginning.
Mark Kravietz is the Managing Partner and Founder of ALINE Wealth, a financial advisory firm that specializes in providing clients with wealth management and financial planning through every stage of their lives. He specializes in exit planning and achieved the prestigious accreditation of Certified Exit Planning Advisor (CEPA®) from the University of Chicago’s Booth Business School. Mark holds the Certified Financial Planner (CFP®) designation, as well as the Certified Investment Management Analyst (CIMA®) designation from the Wharton School of Business. For more information, please visit www.AlineWealth.com. @mkravietz