All business owners will eventually exit their business. This may be due to retirement, sale of the business, passing it on to family members, or due to a trigger event such as disagreement, divorce or illness. While you may not intend to exit your business in the near future, exit planning is an important element of your overall business plan. Having an exit plan in place will give you peace of mind, allow informed decisions to be made regarding structuring and tax planning, drive business improvement and clarify your hiring decisions.
Despite business owners acknowledging the importance of exit planning, research consistently shows that most are insufficiently prepared for their inevitable exit. According to research conducted at Stanford University by recruitment firm Heidrick & Struggles, more than half of surveyed businesses were not actively preparing a successor, and a third of surveyed businesses could not think of a single viable candidate. Research undertaken in Australia by consulting firm RSM showed that only 46% of the business owners surveyed had a plan to exit the business.
Why does this gap exist between knowing and doing? Many business owners don’t address exit planning because they do not intend to retire in the near future or feel that they are too busy with day-to-day operations to devote resources to an event which is not on the immediate horizon. Some business owners have more personal and subconscious reasons for resistance. These can include the business being a huge part of their identity which they cannot envision being without, or there may be an addiction to the busyness of the business or perhaps a reluctance to delegate responsibility.
A good way to start thinking about exit planning is to develop an awareness of the exit scenarios available to you given your goals, amount of time available, potential successors and current state of the business. Remember that it can take three to five years to get a business exit ready. When business owners wait for a trigger event, they often rob themselves of their most precious resource – time. Those that do engage in exit planning realise greater rewards and satisfaction after their exit.
Common ways to exit a business
1. Selling a business
Planning the sale of your business involves making specific decisions about why, when and what you are selling, and who you are selling to. Financially, the best time to sell is when your sales and profits are increasing. Market conditions will then add another variable to the value of your business and the availability of potential buyers. You will need to give yourself plenty of time to get your business in the best possible shape before you advertise it for sale. Some areas to focus on are:
- increasing profitability
- reducing costs
- building a strong management team
- expanding your online presence
- ensuring assets are in good condition
- developing comprehensive business, marketing and succession plans
- settling outstanding legal or tax matters
- securing ongoing revenue streams
- documenting systems and processes
2. Passing a business on
If you have invested time and energy growing your business, then selling your business on the open market may not be as appealing as passing it on to someone you know and trust. You may want to exit the business entirely or you might stay on in a reduced capacity. This type of exit strategy is called succession planning.
A succession plan will have two main factors: the transfer of power and the transfer of assets. A smooth transfer is required to preserve the ongoing viability of the business and will require a lot of planning. You will need to define exactly who will take over the business, when this will occur and how the transition will take place. There are many implications of this scenario to consider, including:
- Will the owner sell or gift the business to the successor?
- Will the owner retain a role in the business?
- What will the financial and tax implications be for the departing owner and the successor?
3. Closing a business
Closing a business simply involves closing the doors, selling off business assets, paying off all debts and keeping whatever funds are remaining. There are a range of legal requirements involved in closing a business, as well as financial and emotional costs that may affect you, your employees, suppliers and associates. This is not a usual choice if a business is performing well.
Examining your business exit options
If you haven’t given a lot of thought to moving on from your business, we encourage you to start the process by taking an objective look at your exit possibilities. Here’s some food for thought to get you started…
- Do you know what you want for the ownership of your business?
- How important is it to maintain your business’s legacy / your personal legacy?
- Are there family members that may want to take over the business? Are they capable and qualified? Do you want to hand it over to them?
- Do you envision selling your business? If yes, would you still like to maintain some influence / control? Or, would you like to simply walk away and move on with your life?
- Are you relying on the sale of your business to fund some or all of your retirement? If yes, do you know how much money you will need for this?
- Would you consider selling your business to your management team or employees?
- Do you envision retaining a portion of your ownership?
- Would you consider maintaining ownership of the business?
- Read our article on valuing a business.
- Read the ATO guide to exiting a business.
- Find out how to manage people through change.
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