Do you have a business exit strategy? For many in our industry, that is a very scary subject to deal with. But the fact is that great business leaders have exit plans. Retiring without an exit strategy could cause employees or clients to get the wrong impression. It could cause years of hard work to leave little to show once the owner retires.
As a consultant and supplier to the vending and OCS industries, I am continually amazed at how few business owners have an exit plan.
The end may seem an odd place to start, so let us look at the reasons why having an exit strategy is such an important step in the business planning process.
There are three basic lifestyle goals for you to choose from that will affect how you run the business.
1) Sustain your personal lifestyle. This business has one aim, and that is to fund the owner’s existing lifestyle. This determines how much money you take out versus how much you reinvest.
Under this lifestyle goal, reinvestment in the business is minimal and most of the earnings are taken out as bonuses, dividends, etc. Your exit strategy is to simply wind up (liquidate) the business when you retire.
Systemization of management processes is helpful to running the business efficiently, but it is not critical to the owner’s long-term goal.
2) Build and sell. This business has a very different aim. The intention here is to grow the business, which within a predefined time frame you are going to sell, in whole or in part.
Under this lifestyle goal, reinvestment in the business is maximized and only minimal earnings are taken out as bonuses and dividends.
This business needs to be fully “systemized” with proper processes, policies and procedures in place. So when it is sold, and the owner is taken out of the equation, the business continues to function.
Under this lifestyle goal, many management decisions focus on making the business an attractive proposition to a potential buyer.
3) Keep it in the family. The intention here is to grow the business in order to pass it on to family when the owner retires.
In many ways, this is a hybrid of the first two lifestyle goals. The business exists to fund the family lifestyle, but there still has to be an eye on growth in order to ensure the business’s success in the future.
Of course, if it becomes large enough, there may be the possibility of selling a stake to outside investors.
THE IMPORTANCE OF ‘SYSTEMIZATION’
“Systemization” is more important to the business when the goal of the owner is to sell it or pass it on to family. The key business operating processes are clearly laid out. The aim is to have guidelines which almost anyone with the right training and background could learn in order to operate the business in the owner’s absence.
The more systemized a business is, the less dependent it is on key people, and the easier it is for a new owner to take over.
There are many key decisions a business owner needs to make during the life of their business. Having a clear exit strategy will affect many of the important decisions needed in areas such as marketing, client management, financial reporting, and so on.
DO YOU HAVE A RETIRMENT PLAN?
One of the most important decisions a business owner needs to make early is their retirement plan. This decision can affect what an owner needs or does not need from the sale of their business.
For example, having a standard 401-k without a “safe harbor” plan could limit what the owner (and the employees) can defer on a regular basis. The most common types of retirement plans are 401-ks, Individual Retirement Accounts (IRA)s, Simplified Employee Pension plans (SEP IRAs) and Keoghs.
This is an area that you must discuss with your accountant or financial planner.