If you’re like many small business owners, the last thing on your mind is the thought of transitioning out of your business. According to a recent Wells Fargo/Gallup Small Business Index survey, 70 percent of business owners said they do not have a formal, written exit strategy or plan in place to outline what they’ll do with their business when they retire or are unable to work.
However, a business exit strategy not only means having a plan for the unexpected – including financial hardship, injury, disability and even death – it also means having a plan for the succession or transfer of ownership of your business when it comes time to hang up your hat and retire.
Here are a few things to consider that can help you get started and prepare an exit strategy for your business:
Whether you pass the business on to a family member, sell to an external buyer, or choose another exit strategy, thoughtful planning is essential to making your transition successful — not only for you and your successor, but also for the long-term health of your company.
You can establish this plan at any time. However, it’s a good idea to create a transition plan at the same time as you develop or update your business plan. If you want to exit by selling the business, for example, you might include a timeline for courting potential buyers. If you want to pass the company along to an internal candidate, on the other hand, you might include a strategy for choosing and training your successor. Framing a successful transition and developing a schedule will be important so you know which steps need to be carried out, who is in charge of each step and when you want those steps completed.
Identify transition options
If you’re looking to sell the business, first decide what kind of buyer you’ll sell it to. This could be an inside successor – such as a shareholder, partner, or manager. It could also be an outside owner of a related business, or even a major customer or vendor. Once you’ve identified your target buyer, prepare your financials, resolve any legal issues, and take steps to make your business as attractive as possible. Solid finances and a plan to keep management running smoothly after you’re gone can all help maximize the value of your business. If you decide to close your business or retire, it’s a good idea to talk with your banker to discuss which type of plan may be best for you and your business. If you’re a sole proprietor, you may simply decide to close up shop. But if your business is set-up as a partnership, you and your co-owners must make the decision collectively.
Prepare a business evaluation
A full business evaluation will help you maximize proceeds from a sale, or help ensure sustainability and growth after you leave. Prepare for a professional business evaluation by gathering three to five years of accurate and up-to-date financial records, a current profit-and-loss statement, a list of your business assets, legal documents – such as partnership agreements or articles of incorporation – and any other documents – including copies of major contracts that may help a professional evaluate the worth of your business. The methods used to value each company are unique and are driven by the type of industry you are in.
While creating an exit strategy isn’t top of mind for most small business owners, every business transitions at some point. By scheduling time to think about your long-term goals and put in place the right process and structure before exiting or transferring ownership of your business, you can help ensure that transition will be a success.
Karina Gray is Arizona Small Business Manager at Wells Fargo.