The Three Step Process to Determine Your Exit Strategy
When you become a business owner, you should be sure have an exit strategy from day one. While planning your exit might seem counter-intuitive when you are just starting your business, it can actually help you run your business more efficiently throughout the lifecycle of your business. Your exit strategy will not only guide how you run the business, but it will also make for a smoother transition when you decide you finally are indeed ready to exit.
Following this three-step process can help you decide what the best exit strategy for you is.
- Define your personal goals
All business owners should define the most important objectives in terms of their financial goals. You should know how you will ensure your financial security after you leave the business. You should also have an idea of who you’d like the business to be run by when you leave.
Do you want the company to stay in the family? Do you want to ensure key employees are rewarded when you exit? Answering these questions with your advisors will give you time to make sure your financial and personal goals are met.
As a business owner, it is unlikely you will receive all cash at closing if you want to transfer the business to a family member, friend, or employees. Most of the time family members do not have the funds to be able to purchase a business and then keep it running profitably.
Decisions should be made far in advance of your exit. It’s essential to consider what is most important to you. Would you prefer to walk away with all cash in hand by selling to an outside buyer, or structuring a deal that can potentially sell the business to family members or close associates? Your preference will guide how you run your business and prepare for your exit.
- Know the difference between value and salability
Just because your company has reached a certain value, it does not mean that it would sell for that amount. Salability depends on external market conditions and other aspects that are outside your control. For example, the option to sell your business for cash may be impossible because of a downturn in your particular industry or the area it is located.
Once you have clearly defined your business objectives, you need to understand the market value and the salability of your company. This can be achieved through a professional valuation. This analysis will help you eliminate certain exit strategy options.
- Understand tax and legal implications of your exit strategy
If you don’t know the tax liability or potential legal consequences of your exit strategy, you may find yourself facing significant adverse tax consequences in addition to legal agreement entanglements when you try to leave.
For example, if a transaction involves the sale of assets, there can be significant tax implications depending on your business structure. You will want to consider existing legal agreements and the consequences of changing them. Never make decisions without a CPA and an attorney guiding you towards favorable outcomes.
No matter if you plan to sell to a family member, an outside party, or even liquidate, you will need to understand the financial and emotional implications of all of your options. Even before you start your business, you should have a plan in place for your exit.
Darren Harrington is Vice President Commercial Business-M&A of Creative Business Services/CBS-Global.
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