Aspiring entrepreneurs take an idea and work diligently, methodically, and passionately to shape it into a viable business. Their vision comes to fruition through careful planning. Too often, though, owners don’t extend the same consideration to the other end of the spectrum: transitioning out of their company – and turning it into an asset that will fuel their next dream.
Taking a disciplined approach to exiting your business is critical so that you – and your family, management team, and other stakeholders – are well-informed and fully prepared to take the next steps. So the question remains, when should you start?
Is It Time? Classic Exit Triggers
According to the latest Financial Planning Association/CNBC Business Owner SuccessionPlanning Survey, most (78%) of small business owners plan to sell their businesses in order to fund their retirement. Despite this, less than 30% actually have a written exit or succession plan.
As Ron Tamayo, CFP and principal at financial advisory firm Moisand Fitzgerald Tamayo, explains, “Turning over your company is a hard transition that many entrepreneurs don’t want to face or think about. That’s why they never address the issue until the 11th hour.” Or, as Patrick Ungashick, Author of Dance in the End Zone puts it, “Don’t wait until you’re on the one yard line!”
Addressing exit, though, is, as Charles Schwab reminds owners, “essential to risk management, protecting your trading capital, and limiting losses.” He advises, “Don’t just focus on how to get into a trade, but how to get out of it as well.”
There are classic triggers in a business owner’s life that reinforce the importance of a sound exit strategy – and that prompt you to shift your focus to “getting out.” These include:
- Age. Baby Boomers (age 50-70) own more than 12 million businesses – 70% of which will change hands in the next 10-15 years. When you reach this age, you tend to look at the next phase: what will my legacy be? What do I want to do now? What does retirement look like for me?
- Health. They say 60 is the new 40: maybe, but did your hip joints and heart get the memo? Even if you are in great health, you may start to notice changes and realize you’re not invincible, nor are you going to live pain-, injury-, or ailment-free till age 105. Emerging health concerns often supply the impetus to start thinking about your legacy and exit.
- Partnership Issues. Say, for instance, that you started your company with a partner and grew it together over the last 20 years. Now, you want to sell, but he wants to pass the business to his children. You can let the issue fester until it becomes a crisis, or you can use it as an opportunity to start exploring your options.
- Management Team Concerns. Perhaps your plan is to hand your business off to a member of your management or leadership team. If that is the case, is that person also nearing retirement age? When you look around the table and realize that possible successors are pondering their own “next steps,” it emphasizes the importance of planning your exit sooner rather than later.
- Career-Aged Children. When you started your company, you may have dreamed of leaving it in the hands of your children. Now that they are ready for their own careers, is this a viable plan? Does your partner want that too? More importantly, do your children? And, if they do, how can they pay for it? Do you want to loan them money from your own retirement? Family discussions are always difficult – and tempting to avoid. Resist the temptation.
Too Early to Plan?
When is it too early to plan an exit strategy? The answer is simple: never. It is never too early. Say you’re a 31 year-old entrepreneur who is heading up a successful company. You want to exit when you’re 45. This is becoming less and less unusual as Millennials flood the workplace: their “what’s next?” comes much earlier, and they want to be ready. Good for them!
Spending time now to research, think, plan, and discuss your exit with relevant parties (e.g. your spouse, children, partners, CPA, attorney, management team… and someone to act as your quarterback to help manage the process) ensures you get all that hard work out of the way and can focus on building your business for the next 15 years.
Yes, your business will change. Yes, the market will change. Yes, you will change. But having a plan enables you to adapt to change agilely, rather than scrambling to keep up. There is no risk in planning; there are tremendous risks in not planning.
Now, when is it too late? The obvious answer is when you are no longer capable or desirous of running the business on a day-to- day basis. Health issues can derail your exit – but so can tax issues.
Say you want to exit your company, which is a C Corp, in a year or two. If you sell in that timeframe, you could end up giving 90%+ to the government. That’s quite a dent in your retirement fund. Now, you may transfer your company to an S Corp or LLC, which are taxed differently. But the problem is that the government requires that you stay in business for five years under your new status before you get the full tax benefit.
If you’ve left planning until two years, one year, or less before your anticipated or desired exit, then it may be too late to mitigate the tax burden. Just one more reason why it’s never too early to plan for the future with your tax, legal and exit planning strategist – it comes much sooner than we expect.
Is it time to start thinking about exiting your business? Yes. Whether you’ve just started it or retirement is quickly approaching, the answer is “yes.” Waiting for triggers, waiting until it’s too late, puts your retirement and/or future dreams in jeopardy. Your business was the result of conscientious planning: ensure that your next steps are as well.