When’s the right time to begin thinking about business exit planning? The short answer is: now.
Unfortunately, most business owners make early decisions like they will own their business forever, when the reality is they won’t. This is why business owners frequently ask for an exit planning timeline that works backwards from a desired sale date.
For example, a business owner may want to retire at 60, so they ask if they should develop an exit plan six months, a year or three years before that date. However, working backwards from a desired sale date is backwards thinking, and it can be detrimental to a successful exit.
Here’s our case for why business owners should start exit planning early, because you should be prepared to sell any day instead of someday.
Exit Planning Motivation
If you wait too long to begin exit planning, you can expect to see a negative effect on your business value, transition ease and post-exit lifestyle. In other words, an early start results in a much bigger impact, so owners should begin exit planning now.
Did you know 50% of owners end up exiting their business years before they planned to due to life events that were out of their control, such as death, disability or divorce? Owners who start business planning early are able to navigate and set their heirs up to navigate an unplanned exit more easily and successfully than those who don’t.
One of the primary purposes of exit planning is to build a business’s value by viewing it through the eyes of a buyer. The easier you can make the transition to a new owner, the more valuable your business. Starting early allows owners time to really build that value and ensures, even after an unplanned exit, they get the most value out of their business.
Preparing for Retirement or Your Next Business Venture
Another significant part of exit planning is solidifying your personal and financial goals for life after exiting the business. Proper exit planning includes determining what those goals and plans are. Questions you should consider before or during the planning process include:
- If you plan on exiting your business at age 60, and have an expectation of living until age 95, how will you financially support the remaining 35 years of your life?
- Have you determined your desired retirement lifestyle? Do you know how much it costs?
- Will your personal assets after the sale of the business sustain that lifestyle?
- What will get you excited about getting out of bed each morning, when you no longer own a business? Will these activities ignite your passion and provide a sense of purpose?
- Have you determined what these activities will cost over many years of retirement?
From a purely financial perspective, you should consider how much you will rely on the business sale proceeds to fund your retirement expenses. If you will rely heavily on the payout, then you need to think about what the business is worth today and whether or not that value will sustain you through retirement. Knowing that number early and often throughout your business ownership will help you either adjust your retirement goals, or change your business to grow its value.
Effective exit and succession planning addresses these issues and prepares the business for an exit and sale that can sufficiently fund your post-exit goals and lifestyle. It also prepares the business for sale at any time, so the need to exit the business early doesn’t result in a fire sale or any additional anguish for the owner or their family members.
The key takeaway here is the more time you invest in building value, the more your business will be worth. When you start exit planning early, you have the time to accelerate value growth. But when you procrastinate, an exit will likely result in a lower business value.
Exit strategy and planning is a mindset of building value in the business every day, and taking action to prepare the business for sale at all times. It does not imply or assume you will sell your business any time soon. It's simply good business strategy. So why wait?
Rich Gunn and Jasmine Menard-Lenczewski are the leaders of BPM’s Value Acceleration Service Team, which helps with succession, transition and exit planning for business owners. Rich and Jasmine are both Certified Exit Planning Advisors and members of the Exit Planning Institute.Contact Rich at RGunn@bpmcpa.com or 415-288-6218 or contact Jasmine at JMenard@bpmcpa.com or 415-288-6205.
The Business Owners’ Special Series (BOSS):
The Business Owners’ Special Series (B.O.S.S.) is made up of several informational articles for business owners who are proactively seeking guidance from experts on how to implement value acceleration in their business. Be sure to keep reading, if you desire to develop your business to its maximum potential value and gain an understanding of how and why beginning the process sooner results in building greater value.