50 Ways to Leave Your Business, Well Almost 50

by

Joan M. Gruber Ridley

OK, so maybe we have yet to identify 50 ways to leave your business, but would you believe we have identified 34 ways? Paul Simon came up with 50 ways to leave your lover a few decades ago and his concept certainly applies here. His point is this, the possibilities are far more than most of us realize, and so are the exit strategies for most business owners. The good news is, you have options. The bad news is, determining the right one for you can be nearly overwhelming with all the variables to consider. We can simplify the decision making process by organizing your options into seven few basic categories and by listing examples of the options for each category:

Determining exactly which option is right for you is a challenge that many business owners put off until it is too late. Opportunities pass with time and options are eliminated. In addition, the value of the business will, to a great extent, determine the options available to you. The smaller the business value-wise, the fewer are your options. And, value is determined by far more than just the profitability of the company. One thing is certain, if you wish to leave your business on your terms and on your time table, you need to be proactive about understanding your exit options.

We recommend that you follow a well-thought-out process to determine which exit option is best for you. This process will ensure that your exit options are consistent with your personal goals and take into account the realities of your company and the marketplace.

Get Clear About Personal Goals

You need to be totally clear about your personal goals. Start by having a clear understanding about how much money you will need to live the lifestyle you envision after you are out of the business. Do you want the next generation to “take over” the business? What about your loyal employees? Do you wish to reward them in some way. What about your key people? Do you want to share ownership or sales proceeds with them? Establishing well defined and written objectives is the first step in the exit planning process. Doing so in advance of your exit gives you and your advisors the time necessary to make your goals a reality.

What if Goals Conflict

With the help of your advisors, you need to determine whether your goals are consistent with each other. Very often this is not the case. For example, many business owners want to receive all cash at closing when they exit their business. At the same time, the owner may want to transfer the business to a family member or a key employee. Unfortunately, these two goals may be mutually exclusive. Family members and key employees often do not have sufficient capital to structure a transaction this way. A great deal of stress and heartache can be avoided by addressing these kinds of issues early in the process.

How Salable or Valuable is Your Business

Once you have defined a set of consistent objectives and goals, you need to understand the value of your company. This analysis is important in that it will provide you with further direction and can eliminate certain exit options. For instance, your business needs to be a certain value for an ESOP to be realistic. The same is true for other exit options.

For example, if the value of your company is below what you feel you need to support a comfortable lifestyle after your exit, you may decide to take some time to enhance the value of your business or to do further financial planning to ensure you clearly understand your financial needs.

In addition to understanding the value of your company, you also need to understand how salable your business is. Value and salability are not always the same. Salability determines how quickly a business will sell and how much leverage a business owner will have when negotiating with a buyer. Salability depends to a large extent on external market conditions. External conditions are things that are out of your direct control like business, market or financial conditions. For example, the option of selling your business for cash to an outside buyer may be eliminated because of a downturn in your business or industry.

We recommend that you work with a professional who actively woks with buyers and sellers of businesses everyday to determine the value range of your business. While a credentialed valuations professional can be helpful, a mergers and acquisitions professional is more likely in a position to know what the currentmarket will bear regarding price and terms for your type of business. Only a professional who is actively talking with buyers every day can give you an accurate read of the marketplace and a “real world” sense of the value and salability of your company. If there is little demand for your type of business, or for your particular business, and for terms that you can live with, many of your options will be eliminated. Selling to family, employees, or management might be a more viable option.

Examine Tax and Legal Implications

The final step in determining the best exit path for you is to evaluate the tax and legal consequences of the exit options that are available to you. This evaluation will include factors such as legal structure of your business entity, how its ownership is structured, exiting legal agreements, as well as any changes that must be made. For example, if a transaction involves a sale of assets and the company is a “C” corporation, there would be significant adverse tax consequences. Good advice from your CPA and attorney can help minimize the taxes you would otherwise have to pay.

Using this process, will help you narrow the list of exit routes to determine which one is best for you. The important thing is to start early. This process will take longer than you think.

 

Joan M. Ridley is president of Business Wealth Solutions, a Dallas-based advisory firm that consults with business owners about how to successfully grow and leave their business. Visit our website at www.bwsllc.net. Call us today at 214.692.9192 for a complimentary meeting to learn how we can help you get where you want to go.

Copyright 2006 Joan M. Ridley