The truth of the matter is, every small business owner will transition away from their business. While most owners have spent a lot of time working in their business, and at times on their business, they have not given much thought to what to do after the business.
Whether you love your work so much that you would be happy to die at your desk, or you would like to devote much more time to your golf game (or other hobbies), every owner needs to consider their exit.
There are three major objectives that every owner should consider before reaching the point where they must exit.
Timing – When do you want to leave?
Financial Needs (post-exit) – How will you support the post-exit lifestyle you desire?
The Business – Who will take care of your baby when you’re no longer there?
Advanced planning has significant benefits.
When do you want to leave?
Unless you want to die at your desk, you need to decide on a specific timeframe for transition and understand the implications of that timeframe. Can the business be effectively transferred internally within that timeframe? If not, will market conditions allow for a successful sale to a third-party? Will these options allow you to realize your financial goals within the timeframe established?
How will you support the post-exit lifestyle you desire?
Depending upon your success in accumulating personal assets and on the success of the organization, your answer to this could vary widely. For the vast majority of owners, the business represents a significant portion of their net worth. Whether the business exit is achieved through an internal transfer or a third-party sale, the owner will need a residual stream of income. It is very important that work closely with a CFP and a tax professional so that you can effectively plan out your remaining years and so that you can enjoy the standard of living you desire. Moving forward without a plan can result in bad decisions and significant tax consequences.
Who will take care of your baby when you’re no longer there?
Choosing the leave your business is a significant and emotional decision. You’re giving up “your baby”. There’s the emotion of giving up your hard-won, successful business as well as a desire to take care of loyal, long-term employees. Multiple options exist, from a transfer to children, sale to key employees, employee stock ownership program or sale to a third-party. Significant factors come into play here, the most critical being who has the best skills, knowledge and temperament to own and run the company as good as you have.
Advanced planning enables conversations to be had so everyone’s expectations are clearly understood before the day when your transition occurs.