What is an Exit Plan and Why do YOU need one?
An Exit Plan, or Succession Plan, sounds to me like “pre-need” arrangements at the mortuary!
At the end of the day, you’re dead and don’t care, right?!
I’ve been in the exit planning field since 2008 and have encountered varying degrees of attitudes to planning one’s departure from his/her business.
Most business owners are very enthusiastic in the discussions as understand why planning is important and valuable, yet when it comes down to actually doing it…
…succession planning is always pushed off until “tomorrow.”
Over the years I’ve come to realize that owners avoid exit or succession planning because:
- it confronts owners with their mortality.
- of the perception that it’s a lot of work.
- it causes owners to think about details that are more easily postponed until tomorrow.
Well, you know about tomorrow…
Here is a solid reason to think about exit planning NOW
… someday you will retire and if you are like me, you don’t want any bumps in the lifestyle you have earned and you would like to leave something to the kids.
Spending a little time in advance of that exciting day WILL put more money in your pocket, give you a shot at a better lifestyle in retirement, and put you in a position to leave something valuable for the kids or grandkids… if you want too!
I’ve boiled it down to four simple steps for you to successfully prepare for your “Life Beyond Business” ™
1. Define the Dream
Yes, I said it!
Take some time to think about what you want your “Life Beyond Business” ™ to look like. Bring your husband or wife into your dream and really try to envision what you would like you future to include.
- What will you do with your time and energy after you exit your business?
- When do you want to sell or transfer your business?
- Who is the best buyer for your business?
- How much after-tax income will you need to support your “Life Beyond Business”™?
Addressing these questions before you are ready to sell will enable a smooth transition; one without surprises and unintended consequences.
2. Prepare the Business for Sale or Transfer
Will the proceeds from the sale of your business, when added to your existing personal resources, be enough to support your vision of “Life Beyond Business” ™…or do you have a “value gap?”
Identify whether or not you have a Value Gap by:
Most Probable Selling Price valuation. Determine the market value of your business today. Calculate the after tax proceeds.
Identify the future earning that can be generated by your current personal assets, excluding your personal residences.
Add the income that can be generated from after tax proceeds of the sale or transfer of your business to the earnings generated from your personal assets. Is it enough to support the cost of your dream in step one?
If so… congratulations! You can fund your vision of your “Life Beyond Business.” ™
If not… you have one of two choices:
- Scale down your vision
- Increase the value of your business
Will the business sell for the maximum value and minimum tax?
What improvements can be made to operations to increase cash flow and desirability of the business in the eye of a buyer?
Is the business the correct legal entity to minimize taxation on sale?
3. Ownership Transfer
Find the right buyer.Selecting the right buyer, whether an outside third-party or insider, is essential to your ability to support your “Life Beyond Business”™ and your long term security.
Can the dreams defined in step one be fulfilled by:
- Selling the business to an unrelated third party?
- Transferring the business to a family member or key employee?
4. Estate Planning and Business Continuity
Through the exit planning process you identify two very important factors:
- What if you don’t live long enough to enjoy the benefits of your business ownership? What should you do to protect the value of your business to support your family in the event of your death of disability?
- You have recognized your silent partner Uncle Sam and how much his cut will impact your “Life Beyond Business.” ™ Make sure that Uncle only gets what he legally deserves. No more and no less.
The last item I need to stress is time.
Don’t think you need to do this all today.
Take your time, three to four years before you may think you would like to transition out of the business is a good time to really begin delving in to these questions (I understand, this timeline may change daily).
Start by gathering a team of trusted managers and advisors, use these four simple steps as your focus, and begin to build a plan… an Exit Plan… it’s not as hard as you think and the financial and peace of mind rewards will be enormous!