6 Reasons why a planned Business Exit Strategy is needed
Every businessman begins with a dream of what a successful business will mean to his family's lifestyle. The predominant thoughts of a business owner has been about how to make a profitable business. It is for the same reason that for a business owner, you need to look into your exit strategy. Here are 6 exit scenarios that must be taken into consideration for your business;
1. Death: The issue of the death of a business owner should be considered during the start-up of a business. Unfortunately, during the creation of many buy/sell agreements the issue of death is only addressed at the urging of a life insurance agent. At the meeting, you arbitrarily decide how much insurance you can afford and how much your company is worth, when in fact you do not know.
2. Disability: Death is not as likely to end the business relationship as disability. Small business survival will often take prescient over paying a disabled partner. If the person is important to the business, the financial strain impacts the business and the family who depends on the income.
3. Separation: You can imagine the torn feelings if a disability occurs, but what if the partners cannot get along? How do we split a partnership without financially ruining each other? It may be complicated by many personalities, some may not even be a part of the dispute, yet may be affected financially.
4. Departure: You may all be happy working together, but your partner or you may decide to leave for another opportunity or simply to take life easier. Who is going to do the work? What is owed the leaving partner? Where is the money coming from? All important considerations for your business exit strategy.
5. Sale: Your company may eventually be the target of an acquisition by another company. You and your partners have decided to sell. How would this impact your lifestyle and your personal financial position, both you and your family?
6. Succession: You have built a successful and viable business and your children have also found a footing in the operations of the company. Your plan is to let them inherit the business but you know it can be more complicated than what your good intention is to be.
A Fair Buy/Sell Agreement
For the small business owner, each of the above 6 scenarios has special demands on: family, income, taxes, and transfer of control of assets. An agreement, commonly called buy/sell agreements, can be used to handle some of the above scenarios. The concern of the family or income can conflict with the business. The business exists as a separate entity. Reduce conflict by developing mutual fair agreements and the desired level of income.
Creating a Business Exit Strategy
Once you understand the above scenarios, include the following actions in the creation of your business exit strategy:
- consider incorporating your small business to legally recognize yourself and your business as separate entities.
- find a method of determining the value of the corporation that can be done at least annually and will qualify tax and accounting standards.
- develop an employee benefit plan that will assist with the departure of each partner in each of the above scenarios.
- plan for who retains company ownership and who gets paid off.
While it is your dream to build a business of your own; bring it to life; and make it successful. How you plan your small business exit strategy will determine your financial success. Just as building a successful business takes planning, hard work, and a little luck, so does leaving it.