What is Exit Planning?
Simply put, Exit Planning is a designed plan to leave your business on your own terms. It is one of the most important parts of your overall business plan. In fact it could very easily be considered the most important part of you business plan.
One reality of business ownership is that every business will change hands sooner or later unless it simply closes the doors. Planning for the transition of ownership will help business owners maximize the return on their years of hard work.
As business owners we learn, often by trial and error, how to operate our businesses in a way that generates a profit. Operating a profitable business takes a good deal of attention and effort for most business owners. It is not surprising that thinking about selling the business usually does not come into a business owners mind during the daily challenge to make a profit. The idea to sell our business too often tends to coincide with our need or desire to exit the business or retire within 12 months.
Planning for the sale of your business will help eliminate potential surprises. Waiting until the last minute to consider the sale of your business can be setting yourself up for an unpleasant surprise. Here are a few things to consider as an "Exit Planning Roadmap".
There are no "perfect" businesses. ABMI, having sold thousands of businesses over the last almost 30 years, has brokered many "almost perfect" businesses, but, we've also found that there are buyers "out there" for just about any business, if the price and terms are attractive. Of course, the more "perfect" a business is, the more it is likely to sell for. So, below are comments about the most common "value drivers" in determining price and terms.
- Management Team
Is there a stable management team in place that will most likely stay after the transaction? How active is the owner in the management of the company? How difficult will it be to replace management?
- Operating Processes
Is there a defined, consistent process in place to deliver the goods or services? Are the operating processes documented?
- Customer Base
Is the customer base composed of multiple accounts, or is a significant portion of your business generated from a small number of key accounts? How long have your customers been doing business with you? Does your customer base typically generate a one-time sale or is there repeat or recurring revenue associated with the accounts?
- Appearance of Facility
Is our workplace neat and organized or dirty and full of clutter? A disorganized workplace can give a negative impression to potential buyers.
- Financial Records
Do you have good financial records? Do you have internal controls in place to prevent inventory shrinkage or theft? Are you accurately reporting all income? It is difficult to capture value from “unreported” income.
- Cash Flow Trends
Is the cash flow for your business declining or increasing? Declining cash flows always raise concerns for buyers and lenders. Consider implementing changes to stabilize cash flows prior to the sale.
- Growth Strategy
Is there a realistic plan in place that could generate grow for the company? Buyers are usually interested in improving the business. Be prepared to helping potential buyers understand how the business could grow in the future.
- Tax Considerations
Obtaining maximum value from the sale of your business is only part of the challenge. The after-tax proceeds that actually make it to your pocket is the other part. You should consult a professional knowledgeable in the transfer of businesses to help advise you. There are a number of tax savings strategies that can substantially affect the amount of after-tax proceeds generated from the sale. In most cases these strategies must be in place prior to acceptance of a sales contract (Letter of Intent or Offer to Purchase) for your business. ABMI will work with your accountant, attorney and tax planner/advisor to plan the best tax strategies for you and your family in the sale of your business.
Some tax strategies to consider include:
- Business Structure
If your company is a C-Corporation you should consider changing the structure to an S-Corporation before the sale. Issues associated with “double taxation” can cause you to pay considerably more tax on the sale of assets owned by a C-Corporation. However, there are strategies for structuring the sale of a C Corporation, with minimum tax disadvantages. Contact ABMI for information and details on these methods.
- Charitable Remainder Trusts
Donating all or a portion of your business to a charitable organization of your choice is another way of reducing the tax consequences associated with the sale of your business while helping out an organization that you want to support. This option can provide a good deal of flexibility in terms of residual income to you and potentially your heirs.
When Do I Start?
Whether you are 1, 3, 5, or 10 years away from your expected time to exit the business, there are things you should be thinking about with regard to Exit/Transition Planning. Remember that things can change unexpectedly. It is always better to have a plan and have to implement it earlier than expected than to be caught wishing you had taken action.
ABMI understands the importance of proper planning with regard to the sale of your business. We welcome an opportunity to meet with you to get a better understanding of your goals and objectives and discuss options to prepare now for a future transfer of ownership.
Establishing long-term relationships has been the foundation of our success in the Midwest since 1982. We have developed relationships with a number of very qualified professional advisors that can assist with the exit/transition planning process. Having the right team in place early in the planning process will prove to pay high dividends down the road.
To arrange a no obligation, no cost consultation, you may phone ABMI at 913-341-6300 or register with this ABMI web site, and we will contact you.