Creating a business plan is a first step to starting a business. But creating a business plan to sell a business is no less important. Entering or exiting, when it comes to business, you have to have a plan.
But what do you really need to plan an exit?
As you prepare for the exit of your business, you will need a concise and detailed business plan, written out, specifying exactly what you are going to do, and how. These choices are important because they will influence
- Your tax burden
- Your estate
- Your heirs
- Your retirement income and lifestyle
- Your future involvement in the business
…and much more.
So you need to draft something that covers the main topics. Here is a list of the main items that should be included in the document:
It’s a given most people don’t know exactly WHEN they are going to exit their business. There are countless influences that could change the timing. But, it is still important to start somewhere. Ask yourself this: “Ideally, in how many days would I like to be free of my business?”.
Start from that answer, and make a goal based on it. If your answer is “tomorrow”, well then your plan will be different than if your answer is “in 5 years”. In either case, the best time to start planning for the exit of your business is NOW! You really cannot plan too early. There are significant consequences hinging on when you begin.
For example, the business entity type (corporation, S or C, partnership, sole proprietor), the tax advantages or disadvantages, the cash needs of the business AND the owners, and the method of disposal (sale, succession, ESOP) all play into the picture. Each issue is dependent in some way upon the timing of the plan.
Method of Disposal
There multiple ways of exiting a business. Here are the most common:
- selling the business
- business succession
- employee stock ownership plan
- management buyout
- initial public offering
The initial public offering is simply the first sale of a privately held company to the public. This method (IPO) can work for some companies, but not for most. It is an extremely detailed, involved process and requires a lot of money. Larger, highly successful companies are the only good prospects for this type of exit.
A management buyout is where the management of the company “buys” the stock from the owners. Also not as common, this way only works well in situations involving management having the knowledge and money and agreement between them to make the deal.
An employee stock ownership plan (ESOP) is set up by the company well before it intends to sell; the employees are effectively the recipients of transferred stock. Because of significant tax advantages, this has become popular with incorporated companies.
Business succession is a plan whereby the owner finds someone to take over his business. In other words, someone “succeeds” the owner. This person is often a family member, but can be an employee or anyone, really.
Liquidation is essentially selling all the assets of a company. Unlike selling a business in its entirety, liquidation includes selling only the physical assets, things such as equipment, vehicles, and inventory. And they are normally sold at wholesale prices or less. This form of exiting typically happens when a business is hurting and not making money, or when it is in an industry that is going away.
Business selling is by far the most common way of an owner (or owners) exiting a business. Since liquidation usually leaves the owner with very little, and most children of owners are not interested in taking over their parent’s business (succession), and ESOPs and buy-outs only work in certain corporations, and very few companies have the capacity to sell to the public, a business sale is the preferred and best way for owners to exit their business.
Whatever the plan and design of the exit, a business owner needs to draft a plan based on his method of relinquishment, because every method requires different steps.
Financial Needs and Goals
The business plan deals with needs and goals. An owner must determine exactly what he or she intends to do after the exit, and what the needs are going to be. The answers will vary. Some will have plenty of money set aside to retire, others may have plans of expensive travel they will need to fund, others will have to continue to make a regular income. Still others will have kids they need to support through school…the possibilities are endless. Every owner must nail down exactly what are the needs and goals because how one relinquishes the company will have an affect upon those needs and goals.
Contact Centurion 7 to learn how we can help you PLAN the exit of your business.