For many owners, the answer to one question determines whether they can leave their companies: “How much money will I get when I sell?”
This question is critical, and answering it is Step Two of The Seven Step Exit Planning Process™. Realistically, you can’t exit your business unless you achieve financial independence, and the primary source of that independence is likely to be the funds you receive for your business when you leave.
If the value of an Exit Plan isn’t already obvious, let’s look at a few hard, cold facts…
First, you are far from the only fish in the sea. As the wave of Baby Boomers (born between 1946 and 1964) reaching and passing retirement age crests, the departures of those who own businesses could result in a glut of companies for sale, driving down valuations and giving new leverage to buyers. Simply put,
James Keefe sat nervously in his Exit Planning Advisor’s office. Until the day before, he had been president of Keefe Automotive Sales, one of the region’s largest new car dealerships. Now he was out of a job and felt he was a victim. Naturally, his first thought was to sue those responsible for his misfortune. The targets of his wrath were his younger sister and his mother. They had forced him out of the business.
With over half of today’s 9.5 million owners of established businesses reaching the retirement age of 50 years old or older it is likely that many of you will be ready to leave your business within the next decade or so1. What have you done to plan for that day?
What are you waiting for? How could planning for the biggest financial event of your life not be worth your time and effort?
A successful business Exit Plan achieves three important owner goals:
- Financial Security. (The business sale or transfer provides the amount of income the owner, and owner’s family, needs after the owner’s exit.)
- The Right Person. The owner chooses his or her successor (children, key employees, co-owners or a third party).
- Income Tax Minimization maximizes the amount of cash in the departing owner’s pocket.
With the recent buzz about Baby Boomer business owners preparing to leave their companies within the next few years, there can be confusion about the different terminology used for this planning concept. For instance, many people believe that succession planning and Exit Planning are one within the same and can be used interchangeably when talking about owners who are in the process of leaving their businesses. However, this misconception can end up leaving you unprepared for one of the biggest financial events of your life.
If you simply are not emotionally ready to sell, if there is still fire in your belly — enough fire to fuel your continued investment in the company — or if you ultimately want to leave the business to family members or employees, then you may not be in a position to sell your business — yet. If you and the business are ready to sell, but you still hesitate, let’s look at typical reasons for that hesitation and what you may be able to do about it.
Why You Need To Know The Value Of Your Business Today Even Though Your Exit Is Years Away
In today’s economy, no one wants to spend money on something they don’t need today. So why do you need an estimate of your company’s value when you don’t expect to leave for several or many years?
You don’t — if you fall into one of two groups:
- Owners who are sure that their business exits are more than 10 years away.
“You’ve got to be very careful if you don’t know where you’re going, because you might not get there.” — Yogi Berra
It is not always easy to interpret Yogi. In this case, perhaps he is advising you to figure out just where you are headed in your business. As you near the time when you will leave behind the daily worries and stresses of business ownership, have you defined your successful exit?
Are you like many business owners?
A majority of closely held and family owned businesses will change hands within the next five years; but many Business Owners may not have taken active steps to transition out of ownership.
Again, if you are like many of our readers, the reasons for failing to plan may be:
- You may have simply been too busy working in your business to be working on it — at least until now.