Author: Bob Baker
Options for Your Exit Strategy Get Smaller the Wider the Gap Between What You Have and What You Need
In our blog series on strategic succession planning, we’ve discussed different types of exit strategies, the need for a strategy advisor and an advisory team; and issues related to passing your business on.
One of the themes we’ve talked about is the concept of “readiness” when it comes to succession and exit planning. In particular, financial readiness, mental (emotional) readiness and business readiness. We’re going to take a deeper dive on each of these topics over the next few weeks, starting with financial readiness.
Let’s start with a simple definition. Financial readiness is the degree to which a business owner can meet their lifestyle objectives after exiting their business. An owner that has accumulated savings and investments that can fund their retirement without depending upon income from selling their business or depending upon their business as a source of continuing income has a high financial readiness for a business exit.
A business owner with a low financial readiness will have little saved on a personal level, likely will have most of their net worth tied up in the business, and will depend upon the sale of their business to fund their retirement.
The relationship between financial readiness and an exit strategy is simple: the degree of financial readiness you have is directly related to the number of business exit options you have. While we’d like to think that we can fund our retirement out of the proceeds of selling the business, it’s not always that simple. In fact, out of 27,000,000 businesses in the United States, the number of that sold for over $10 million last year? About 6,700, according to the Association for Global Growth. And, according to BizBuySell, a national business brokerage, the average value of the business exit deals they tracked was $155,000.
There are many more choices for an exit plan for business owners that have high financial readiness because the owner can, in effect, afford to be selective in choosing an option. For example, with less dependency upon proceeds from a sale, the high financial readiness owner can look to transferring the business to family or employees in a controlled manner, or even tying payments to future performance of the business.
Also, the sooner that focus that these objectives are defined and understood, the more time you may have to implement necessary changes and/or be prepared to seize upon opportunities as they may occur.
One of the early steps in succession planning is to assess financial readiness. Essentially, the assessment identifies the gap and difference between what you need, and what you may have after exiting your business. The larger that gap, the more cash you must realize from a sale; the smaller the gap, the more exit options are available.
Unfortunately, strategic and wealth planning advisors are either not involved or involved too late in the process to be most beneficial. These members of your advisory team should do gaps analysis early in the succession planning process in order to identify options and a path for integrating your current net worth status and the value of your business into a retirement funding plan.
For many family owned businesses, it’s tough for the business owner to be financially independent of the business. There are, however, many different strategies and tactics that can be deployed depending upon a sound business valuation and the gaps analysis described above. For a confidential discussion of your situation, exit strategy options and a better understanding of the strategic succession planning process, call JC Jones at 877-899-4072, or contact us here.