While 2022 is shaping up to be a year many stock market investors may look to forget as large companies struggle with supply chain disruptions and excess inventory issues, many small business owners across the country have enjoyed strong sales and profits. Potential buyers of small businesses have taken notice.
According to a recent report from Axial, a business broker for private businesses, activity among potential buyers has surged 30% this year, indicative of a market where sellers can often attract higher prices.
Whether you’re thinking about selling your business soon or years down the road, putting an exit plan in place today can help increase the odds you’ll receive the greatest value for your company.
What Is Exit Planning?
Exit planning is a strategy to leave your business when you want, in the way you want, for the amount you desire. With a solid exit plan, you're more likely to maximize your business's value and meet your personal and professional goals down the road.
Depending upon your circumstances, an experienced small business financial advisor may be able to help you avoid taxes altogether if you qualify for the Qualified Small Business Stock (QSBS) exemption permitted by Section 1202 of the Internal Revenue Code.
How To Develop an Exit Plan
Before you develop an exit plan, consider how long you'd like to remain involved with your business and think about your personal and financial goals. Then, follow these steps.
Prepare Financial Documents
You won't be able to exit your business correctly until you have an accurate account of your finances. So you'll want to gather and verify many financial documents. These may include but are not limited to cash flow statements, balance sheets, bank statements, and tax returns.
Discover the Type of Business Owner You Are
Once you know what type of business owner you are, you'll find it easier to choose the right business exit strategy. Chances are you'll fall into one of these four categories:
- Rich and Ready to Go: Your finances are in good shape, and you look forward to the next chapter in your life.
- Wealthy, But Love to Work: You enjoy work and don't see yourself fully retiring. Working, at least on a part-time or occasional basis, will bring you the most satisfaction.
- Stay and Grow: You know you're not financially ready to leave your business. You're prepared to continue to work and increase your organization's value and net worth.
- Get Me Out Now: While you know your business requires more work to do before you can leave with confidence and security, you're mentally exhausted and ready to move on anyway.
Evaluate Exit Strategies
Review all the exit strategies at your disposal to determine the ideal options for your unique business and future goals. Be sure to weigh the pros and cons of each method and collaborate with a professional like a Certified Exit Planning Advisor (CEPA) to make the most informed decision for your situation.
Communicate With Investors
Keep your investors in the loop about your exit plan. Let them know you will design a strategy explaining how your exit will affect them and how you'll repay them. Answer any questions or address any concerns they may have.
Decide on the New Leadership Team
Depending on your chosen exit strategy, you'll need to pick a new leadership team. It's a good idea to transfer some of your duties while you work on your plan. This way, you can guide the leaders with their transition and ensure they're confident enough to take over.
Once you finalize your exit plan, inform your employees. Be transparent about why you plan to exit the business and what they can expect going forward. Then, anticipate many questions and answer each of them thoroughly. It's wise to do this in advance, so your employees have time to figure out where their careers will take them next.
Lastly, share the news with your customers via email, phone, and social media. Introduce the new owner to your customers. If you plan to close, provide your customers with alternative solutions.
Business Exit Strategy Tips
Not every business exit strategy is created equal. Follow these tips to ensure your exit strategy leads to a seamless and lucrative exit.
Have a Clear Vision
While you may know that you want to move on from your business, your plans might be up in the air. Take the time to figure out why you're ready to go in a different direction. Maybe you'd like to take care of family or health issues. Or perhaps you feel burnt out and would like to retire. A clear vision of why you'd like to leave your business will motivate you to focus on the most critical parts of your exit strategy and implement it effectively.
Create a Financial Plan
Chances are you'd like to exit your business without worrying about finances. If this is the case, determine the lifestyle you hope to lead. Then, perform the math and figure out the numbers that will allow you to create and sustain it. Working with financial advisors and professionals specializing in exit planning is in your best interest. Once you have a financial plan, you'll need to ensure your exit plan caters to it.
Maximize Your Business Value
You'd sell your business for as much as possible in a perfect world. The reality, however, is that this is easier said than done. Fortunately, you can maximize your business value through several strategies. For example, you may consider adding new products or services to your lineup. Or perhaps you're able to expand your target audience, strengthen your brand and increase your revenue.
The Bottom Line
With a strategic exit plan for your business, you'll reduce your risks and increase the likelihood you'll be able to leave on your terms and conditions, financially content and proud of all you've accomplished. You'll also leave your business behind in a way that benefits your employees, investors, and customers.
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