Few entrepreneurs think about their pull-the-plug plan when they are giving birth to their small business. There’s so many other things to think about…like keeping the lights on, building a team, and finding a path to success, to name just a few.
Trust me, time goes by quicker than you’d ever think. You could find yourself thirty years (or fewer) from launch with no idea of your end game. The truth is your exodus is impacted by decisions you make both at the beginning and as you travel through the ups and downs of business ownership. Keeping your eye on how and when you will depart, and how you will be able to feather your nest for retirement will come in handy someday.
Of course, there is always the possibility that you may want out to do something different. It happens. In that case, cashing out so you can chase your new dream means you’ve built the business precisely for the very purpose of creating a cash return at some point. You can see how these two different goals might dramatically impact today’s business decisions.
You might be dreaming about that IPO. The real truth is almost no one ever sees that day. So, why not take a couple of hours to sit down with yourself and design the correct exit strategy when it’s time to call it quits. This is called being “proactive,” the sure sign of a real entrepreneur.
First, consult your tax advisor. That way you’re working with practical information to help you avoid tax consequences. Talk to your partner or spouse to make sure you’re on the same page. “It only hurts when it’s a surprise” is a maxim that applies here.
Assuming you don’t have a complex arrangement with partners (which is a whole different discussion), there are a number of options to consider.
If the business is a good one, you may want to see it survive. Rather than selling it off to the highest bidder, you may prefer to “keep it in the family” and pass the business to your children or another relative. Ah, the dream of many entrepreneurs. You built your baby from the ground up and you don’t want it to go to some stranger who won’t maintain the same standards.
Reality check: Unfortunately, family succession frequently does not succeed. It’s been reported that 70% of family businesses do not survive the transition from the founder to the second generation. Family rivalries and other dysfunction often intrude to derail the business. The founder refuses to cede control. Just because you own a business doesn’t mean you’re a good judge of your children’s character. Often the successor doesn’t have the “fire in the belly” that inspired the founder. Next-gen leaders and managers may not be good decision-makers. The sibling denied the role of chief executive feuds with the chosen one. It’s starting to sound like a soap opera.
The founder/parent must take carefully considered steps to create the conditions for second generation success to occur. It is important to distinguish between company leader, managers, and owners and make certain that no one feels devalued. You, the founder/parent, should look to preserve not only the business, but also family relationships.
Here’s a radical thought. If you’d like to pass your business along to family members, ask them now if they’d like to become the second generation of owners. If any or all agree to that proposal, get them involved early so they can see all the different aspects of running the business. Find an advisor who is neutral and will give you honest feedback, so you don’t let your emotional attachment get in the way.
Turning your business over to a family member may not mean any immediate cash in your pocket. If no family members are interested in owning and running the business, you may find that one, or several, of your employees may be interested in buying you out. Don’t be shy about raising that possibility. What better way to boost confidence and morale than letting valuable employees know that you trust them enough to place your treasured achievement into their capable and caring hands?
Selling to employees can be a great exit strategy. The employees will be able to invest in a business that they know and trust. They know the challenges and opportunities that the business may encounter. They know the customers and the customers know them. They have institutional memory and know how things run.
Encourage employees whom you know would make successful business owners to consider a buy-out proposal or an employee stock option plan (ESOP). This end-goal can take years to manifest, so it’s best to start as early as possible. Call your business attorney and/or accountant and make sure that you have the best legal structure for the exit strategy that you select.
If the business has tangible assets and healthy sales, your exit strategy can provide for you either a retirement nest egg or start-up capital to create yet another business. I have seen businesses created for the sole purpose of building it up and then selling it. Start the preparations early and keep your eye on the goal.
Maintain detailed and credible financial records: demonstrate profitability; show good cash flow; keep your debt to equity ratio low. Expect to show a prospective buyer 5 years of data. If the business owns property and/or equipment, ensure that all is in good working order.
To sell your business for a price that accurately reflects its value, speak first with your accountant and business attorney, next with a business valuation appraiser and then with a business broker. And, whatever you do, don’t lie, inflate sales data or produce overly rosy projections. This is a good way to set yourself up for a lawsuit by an unhappy buyer.
If you’re selling your business to an employee or an outside buyer, perhaps there’s an easier way to structure the deal than just looking for immediate cash. If the business if profitable, few people are going to have the ability to buy into a business at a high price. Then, there is the capital gains issue to think about. Here’s a thought: If you’re going to sell out, why not have a payout over time? The owner could retain a smaller amount of their salary (and an Emeritus status) and keep his or her employment going, which would also still provide insurance and other perks he or she has become dependent upon through the years.
Calling it Quits
Some businesses, such as micro one person businesses, are entirely dependent on the founder/expert. In that case, the only option is to invest in other ways and save, save, save. It is difficult to know when to skedaddle from a company like this, especially if the cash flow is good. They say “work as long as you possibly can.” In that situation, the exit strategy might entail creating a new paradigm or business model that requires less of your time and energy. Are you a subject matter expert? Possibly creating on-line how-to products for sale might take advantage of your knowledge, but give you the freedom to pursue other interests.
Consider becoming a speaker. With the right promotions and personality, that could mean travel, information products, and meeting lots of new people. Corporations and events are on the constant lookout for quality presenters. It’s a thought.
Vicki Garcia is the Co-Founder of Veteran Entrepreneurs Today & President of Marketing Impressions. She wants to hear from you, and can guide you through your business decisions for free! Email her at email@example.com. Look for trusted advisors, or apply to be a B2B vendor for veteran entrepreneurs at www.veteranentrepreneurstoday.org