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Ten Questions Every Business Owner Should Understand
The funny thing about planning- it is often most useful when it is performed before you need it. If you were going to sell your home, wouldn’t you plan out a number of critical elements first? When is the best time to sell? What do I need to fix to maximize the value? Who will I list it for sale with? This same logic is true with a business but is much more complicated, time consuming, will take far longer than selling a home and there are many more options to choose from. I am going to detail a number of questions every business owner needs to consider now-- in order to have a successful exit-- whenever that may be.
- What do you wish to accomplish from the exit strategy from your business? You went into business in the first place to accomplish certain goals for your life. You need to think about an exit in the same way. Goals are the foundation of any successful strategy and they are no different with an exit.
- Do you know the range of values for your business? Unlike a house which normally sells within a range of the listing price. A business can and does have a number of wide ranging values based upon the method of transfer of ownership. An outright sale to a synergistic buyer will provide the highest value, whereas a gift to family will provide the lowest.
- Do you understand all the options available to you with an exit strategy? Owners of privately held business normally have 5 options available to them. They include; a sale; a gift; a recapitalization; an ESOP or a sale to management.
- Have you calculated the risk factors of your business? It is important for you as the owner, who has lived with your business for many years to understand how a third party would view the risk of owning your business. Ultimately any investment is priced based upon the perceived risk to the buyer.
- Have you developed an income replacement strategy to satisfy your lifestyle after the business exit? Do you have a personal financial plan?
- Have you considered the taxes and fees due at closing, and beyond? If you approach the exit of your business with the idea that you will know the right deal when you see it and do not properly plan the type of deal you wish and understand the cost of each option, you will end up chasing deals that are liable not to close. If you clearly know the dollars necessary to satisfy your post exit lifestyle, you will be in a better position to know the right deal when you see it.
- Do you know that deal structuring can have a serious impact on the net, after tax amount that you receive for your shares? With any exit there are many variations that may occur. Are you selling shares or assets? Is it cash up front or structured over time?
- Are you aware of the estate tax consequences to your business and other assets? In the absence of proper planning, estate taxes can cut deeply into the pie. Should you not plan for the exit of your business and the business needs to be sold at a fire sale price you can lose twice, once with estate taxes and secondly with a reduced sale value of your largest asset.
- Have you identified the legal agreements you will need to sign to complete the transaction? Agreements can include a sale or asset transfers, non-complete, escrow and loan agreements along with potential consulting arrangements. The more you understand the deal you are entering the better prepared to close you will be.
- Have you chosen a service provider to manage the transaction? This is probably the largest single transaction you will execute. Do you know the advisory team you wish to employ? Do you need a local business broker or a larger M&A firm? The right real estate agent will help you maximize the sale price of your house; the same is true for an exit strategy.
Your business is probably the largest single asset you own. Isn’t it worth spending the time necessary to properly think out your own goals and develop an appropriate exit strategy? As a partner with B2B CFO® I am well prepared to help you develop these goals and plan for their successful achievement.