How Exit Planning Affects Your Business Today
Exit planning affects your business. In Dr. Stephen R. Covey’s The 7 Habits of Highly Effective People, Covey instructs the reader to envision attending their own funeral. What would you want others to say about you? What would you want the sum of your life’s work to be? Mentally attending your own funeral is an important step in determining what your next steps will be. According to Covey,
To begin with the end in mind means to start with a clear understanding of your destination. It means to know where you’re going so that you better understand where you are now and so that the steps you take are always in the right direction (Covey, pp. 130).
This principle also applies to business. Exit planning is an important step in determining the objective of your business. Common objectives of business owners we speak with at Peak Business Valuation include making a return, building a legacy, and providing for retirement. Whatever your objectives, determine the right exit strategy early on. Revisit it often to ensure you are pursuing the correct strategy. To borrow Covey’s words again, “If the ladder is not leaning against the right wall, every step we take just gets us to the wrong place faster” (Covey, pp. 131). Peak Business Valuation provides business appraisals for exit planning on a regular basis. Get started by scheduling your free consultation.
Common Exit Planning Strategies
An exit strategy can take many avenues. In this article, we cover four of the most common exit strategies and discuss their advantages and disadvantages. These strategies include the following: liquidation, selling on the open market, a partner or investor buyout, and selling to an employee or a family member. An important first step in any exit planning strategy is to obtain an objective business valuation from a business appraiser. Discovering what your business is worth today can inform you of steps to take to realize your ultimate objective for your business.
Liquidating your Business
First, liquidating your business is the most straightforward way to exit your business. It involves closing up shop and selling off the assets of the business. Business owners are often surprised at how low the liquidation value of their business is. In business, a going concern really is worth more than the sum of its parts. Additionally, the value built up over time with brand imaging, goodwill, client lists, and other intangible assets is not liquidatable. This can be a significant part of your business’s value. However, businesses do not always perform as expected. Liquidating a struggling business may be the best option.
Selling on the Open Market
Next, one of the most common exit strategies is selling your business on the open market. A business on the open market will sell at fair market value, which is the value of a business between a willing buyer and a willing seller under no compulsory means to transact. This value is often higher than a liquidation value and it ensures that you maximize your returns upon exiting. However, a majority of businesses on the open market do not find a willing buyer.
Finding the right buyer can take a long time, and you may not get the price for your business you are expecting. It is important to prepare your business for sale long before you list it on the open market. Consider getting a business valuation to determine what steps you need to take to make your business more marketable. Peak Business Valuation, works with dozens of business owners each month helping them maximize the value of their business prior to selling.
Selling to a Partner or Investor Buyout
Perhaps your interest is in transitioning to your next venture while keeping the business running as usual. If you are not the sole proprietor of your business it is possible to sell your share of the business. This could be to a partner or an incoming investor. If planned properly, you can exit the business without disrupting the flow of business. It is important that expectations for buyouts are set up in the operating agreement of the company to facilitate an amicable transition. Transacting with partners you already know can be easier than dealing with the open market.
Selling to an Employee or Family Member
Building a business takes time, sacrifice, and a significant investment of your life’s resources. One option is to keep the legacy of your business going by selling it to an employee, a friend, or keeping it in the family. This can ensure the business you have worked hard to build continues to serve its customers and employees for years to come. We often see business owners who sell their business at a discount to employees or family members. However, this does not have to be the case.
Business owners who take exit planning seriously have the freedom to pass the reins to someone they trust and “pay it forward.” At the same time, they can provide for themselves through retirement. At Peak Business Valuation, we are inspired by the generosity of business owners who set up their successors for success. Obtaining a business valuation today can help best ensure you can transfer your business easily and meet your retirement goals.
Summary
These are a few examples of exit strategies. As you begin with the end in mind you can determine what strategy best fits your personal and business goals. Consult professionals on this path to ensure your ladder is on the right wall. At Peak Business Valuation, we are happy to answer any questions you may have about exit planning and business appraisals for exit planning. We are happy to provide you with a business valuation to get the process started for you. We can also connect you with a network of professionals that can help you to achieve your objectives. Please reach out to us with any questions you may have! Get started today by scheduling your free consultation below!
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