Business Article - Planning Your Exit
Whatever your plans are for the future: traveling, spending more time with your family, playing golf every day; you'll need to start making preparations now if you want to be in the best financial condition when you exit your business. If you wait until to plan for an exit until there is no time left, you may find your options limited by the current fortunes of the company and by what people are willing to pay at the moment. To get the most out of the exit from your company, get ready in advance and make your exit when the time is right.
How much time do you want to plan in advance before you make your exit? In the best case scenario you should have at least five years or so. This gives you some degree of flexibility; if a situation arises in which it makes sense to sell your stake before those five years are up you'll be able to take that opportunity. You can also make contingency plans so that if you are faced with unexpected events you can quickly make an informed decision on whether or not to make an exit ahead of time. As your five years pass, you should continue to check your progress against the plan on a regular basis and make changes as necessary.
To start putting together a concrete exit plan, consider the kind of life style you want to be living after you leave the company and how much money it is going to require for you to maintain that kind of life style. It is a good idea at this point to meet with a financial adviser. Go over all of your future expenses and make sure that you have a buffer on top of that to take care of emergencies and other special costs. You should also decide on what general time frame you want to sell: whether that means three years, five years or more. Remember that inflation and taxes will have an impact on how much your money is worth in the future as well as how much you are able to get out of the company when you sell - hiring a financial planner is a good way to get professional estimates on the impact of these and other matters that may otherwise escape your notice. Consider the legal structure of the corporation at this point and think about any possible taxation issues you may have - you don't want to be taxed multiple times on things that you essentially already own, but many people do every year as a result of poor planning. Find a way to restructure your company or get the value that you need with the lowest amount of tax.
Once you have a general idea of how you are going to exit the company and what your life will be like, start collecting the concrete data. Take a look at the sum of the company financials and determine how much the company is realistically worth. It is good to get an independent appraisal of your company's value, as owners tend to inflate the worth of their own business; the same way that you get an independent appraisal on a house, you should get an independent appraisal on your business. Now, compare the price for which you could sell your stake in the company and the amount of money which you have calculated you will need in the future to go with the life style that you are aiming for. See whether there has to be a certain amount of growth in the company before you sell to be able to retire comfortably, or whether it is possible to sell right now. Think about the future prospects of the company and whether it is likely to grow substantially over the next few years.
Start putting together a business plan for your company which is specifically geared towards your being able to sell for a satisfactory exit a couple years down the line. Have a sense of what your goals for each year will be and what actions the company will need to take to meet those goals. Will the company be able to grow at the rate that you require simply by continuing in the same pattern of growth as it currently is? If your business has to undergo substantial growth or even change directions somewhat, you may have to figure in special expenses to chart a new course. Make sure that whatever business practices you institute to reach your goals are solid and have an eye towards the future - when the business is ultimately put up for purchase, people are going to want to see that the company still has strong prospects for the future; don't just boost the numbers in order to get the greatest amount of cash when you leave, but make sure that the operating principles of the company remain sound - this way you are likely to receive more offers when the time comes and you may end up making even more than you expected.
This brings up another key point - think about the identity of who you may sell the company to. Will you sell it to outside investors, or will you sell it to someone else in the industry who you know? Industry contacts are a good bet for making the sale because they will have the expertise to run the company well in your absence and they have the knowledge to inform their purchase. You can begin to float the idea of selling the company within the next several years among your friends in the industry and network to find more people who could be interested in buying in the near future. Your own employees may be interested in having partial ownership or some kind of group ownership of the company. By planning in advance you can get a better sense of what things will be like with your company after you are gone and make sure that the people you have worked with continue to have good jobs and get along well in life. If you have a specific successor to the business in mind you can take the time to groom that person for the job and see how your potential successor operates under various conditions in posts of increasing responsibility.
Another common option is to plan to sell your company publicly. While many continue to work at their company after it goes public, many others take the opportunity to cash out soon after the excitement of the IPO. If you are planning to take your company public, you should start running it in the manner of a public company as soon as possible. Make sure that all of your accounting procedures and financial statements are in the condition they would have to be in as a publicly traded corporation. This will make the transition to public company much easier and make your company even more attractive to investors on the stock market when it begins to trade. The more precise that you are with your accounting and business practices the more smoothly things will go in general, whether you are floating your company on the stock market or selling it in any other way.
When it finally becomes time to sell, you may also want to consider hiring a broker to help sell the company. Your broker should be someone who is experienced within the industry at buying and selling companies and their assets. A broker will have enough connections to get you the kind of price that you would have struggled to get on your own. Brokers are good for determining which potential buyers are really interested and which ones are just competitors trying to get a better sense of what your business will be doing in the future. You also have the advantage of removing your own emotions from the equation by going with someone who is independent and can give you an outside appraisal (as you may have guessed, this is a good idea at every stage in order to have the most accurate sense of value and what you can get). Of course, having a broker will also save you a lot of time and headaches by allowing you to focus on the work of your company for as long as possible and not have to spend all of your final months searching for buyers, having endless meetings and pounding the pavement. One of the biggest advantages of going with a broker is peace of mind.
By planning for your exit well in advance you can make sure that your company is in the best possible shape, that it continues to be run effectively after you leave, that you get the best possible price for the value of the company, and that the money that you end up with is enough to pay for the kind of life that you see yourself living after you retire!