Think Business Exit Strategies Early for a Cushy Retirement
Starting and operating a business involves a maze of decisions about the business plan, marketing, cash flow, customer relations, taxes, liability, and more. In making your way through the maze, it is easy to become hyper-focused on results in the short term and some intermediate term planning for growth and even for retirement. However, too many business owners break out of the maze with a successful business, but they do so without having planned adequately for an exit strategy.
If your plan is to keel over at your desk, that is in itself an exit strategy, but not one that most business owners desire. They put into place some type of retirement plan or plans with investments they intend to fund their retirement and an enjoyable lifestyle. Often the most valuable asset they have, the business, is not structured to maximize return on the lifetime investment for success. Consider these exit strategies based on your type of business and your plans for retirementi.
Just Close it Up
In building a successful business, you generate considerable “goodwill” value. It is not easy to quantify, but the successful operating business will have value to someone who wants to avoid a “from scratch” start. Just closing up or shutting down the business throws away your goodwill value. Some owners shut down and then get an offer to buy the business name for residual goodwill value. However, the offer will be far lower than if the business was still operating.
Drain the Business of its Assets and Value
Consider this a prolonged shutdown strategy. If your business does not require a lot of personal management supervision, you could just begin to take out as much cash as possible. Redirecting money that normally goes to marketing, improving the business, new equipment, and other expansion activities is simply taken out and invested in other ways by the owner(s). It is a slow shutdown by just letting the business die over time while taking as much cash out as possible.
There are drawbacks to this strategy. Notably, you will usually be taking some big tax hits when you take cash out this way. A good accountant can help you to mitigate the damage though. You could also short-circuit your plan if you take out too much or too soon and then a slowdown in business results in an early shutdown.
Sell the Business
This strategy can generate considerable cash, but get some expert help concerning taxation, such as capital gains taxes. Selling a business is not like selling a home, as it can take considerably longer, and you will often need a business brokerage’s help in valuation and locating potential buyers. If your long-range strategy is to sell the business, planning for that should start quite early.
One example of early planning is a real estate business or other local business. A considerable chunk of the value of a business is in the brand or name. Too often, the owner uses their own name as a business name, such as Jane Jones Realty or Sammy Brown’s Shoe Repair. Though it is great for the ego, a potential buyer with the same name is not going to happen and some value is lost. It would have been better for the business sale strategy to name it YourTown Deluxe Realty or Leather and Laces Shoe Repair.
Friend or Relative Buyout
This is a business sale strategy, but to a relative, friend, or other business acquaintance. They know the business, understand your investment in time and money, and they often place a higher value on goodwill. However, the good feeling of selling to someone you know can be somewhat offset by a lower selling price due to your relationship and how it influences your negotiations.
Initial Public Offering
This is an option available to very few businesses. Taking a business public on a stock exchange is a drawn-out and expensive process. The business is taken apart piece by financial piece in the analysis of valuation and how the owner(s) take out salaries and perks they receive. You cannot sell the value of that company car you drive, but you can put back that expense in the valuation analysis to increase the expected cash flow for a new owner. There are many of these minutiae in the valuation process, and few companies are large enough to fund the process and get through the time it takes.
The major takeaway from these choices is that you should be thinking about them from your first day in business and moving forward. Building hard asset value along with goodwill value, with proper planning, create a saleable asset that can fund a comfortable retirement.