One day, you will leave your business. You will exit either voluntarily (through sale or retirement) or involuntarily (through death, disability, bankruptcy, liquidation, or fire sale).
As a business owner, you must have a good understanding of each of the three key elements to every successful exit plan if you want to control the process of exiting your business.
The Three Key Elements to a Successful Exit Plan
While success is defined differently for each business owner, most clients tell us that success means leaving the business:
- On the date they choose (Setting the Target Departure Date)
- For the cash they want or need (Determining the Amount Needed from the Sale of the Business)
- To the successor they choose (Choosing Your Successor)
To assist you in designing your exit plan, we work with five important pieces of information:
- Your target departure date
- A preliminary financial-needs analysis
- Your desired successor
- A preliminary valuation of your company
- A future cash-flow estimate
Planning your exit strategy must begin long before any ownership is transferred. Similarly, the transfer of ownership process often begins long before you depart the business or control is transferred. Here, we focus on element one…your target departure date.
Element One: Setting the Target Departure Date
Setting the departure date is critical to creating an exit plan. But this date is likely to be adjusted—perhaps repeatedly—in the planning process. Sometimes the adjustment is necessary because the owner changes the definition of “departing” the business. Sometimes other goals cannot be met within the originally selected timeframe. Sometimes owners simply change their minds. But without a firm departure date, you cannot create a successful exit plan. To help our business-owner clients set their departure date, we ask several questions designed to help them establish their own timeframe for departure. If you can get a clear picture of your responses to the following questions, you will be well on your way to a successful exit plan.
- What does “leaving the business” mean to you?
- In terms of timeframe?
- In terms of your involvement?
- In terms of having to think about the things you don't want to think about or do?
- In terms of beginning to transfer or sell some ownership?
- If you could leave the business sooner, would you?
- Do you want to work until your children reach a certain age or education level?
- Do you want to work until your business reaches a certain value?
- How many active years do you want to live without working?
- Why are you thinking of leaving the business in ______ years?
- When would you like the freedom of not having to “go to work?”
- At what point do you want to begin turning over control of day-to-day operations to others (probably your key employees)?
Your answers to these questions will give you a firm starting point for your exit-planning strategy. Next week, we'll discuss step two in the process—Determining the Amount Needed from the Sale of the Business. To schedule a business consultation please contact us today.