Exit Planning: 3 Keys to a Successful Business Transition

Author: Laura Troshynski, Senior Director, Business Owner Advisory Services

If you’re a business owner, you probably remember exactly when you started your company. Whether it was a day filled with grand opening celebrations or one where you quietly got to work, you had a lot of things on your mind, especially how you’d encourage growth over the long term.

Given your focus on gearing up a successful enterprise, there was one thing you probably weren’t thinking about: how you’d one day transition your business to new owners. In fact, exit planning is something that many business owners never consider until they’re ready to retire.

Exit planning is a complex process that requires several early decisions for a successful transition. If you’re a business owner, here are the top three things you should know now to ensure you’re ready when you want to transition your business.

1.  Timing Is Everything

One of the biggest mistakes that business owners make is not starting the exit planning process early enough.

Despite the fact that 70% of business owners responding to a recent survey planned to retire within 10 years, the majority had given only limited thought to their exit strategy.  Forty-three percent had done no planning at all.

Knowing when you want to transition ownership and how quickly you plan to terminate your involvement lays the framework for the remainder of the planning process. 

For instance, if you know you plan to pass over ownership within 5 years, alerting your transition team now provides them with ample time to prepare for a number of critical factors. How you will optimize your business value for the eventual sale and manage tax implications are just a few examples.

On the other hand, if you’re planning to transition ownership within the next year or less, your planning options will be more limited.

2. Who Will Take the Reins on Your Business Operation?

Many business owners prefer to leave their professional legacy in the hands of family or another insider who has familiarity with the operation. The biggest concern when transitioning a business over to someone you know versus selling to an outside party is whether your successors are prepared to make the necessary financial contributions to assume control.

It’s another reason why timing is key. With a longer preparation runway, your team can help the new owners raise funds and address any tax implications related to the transfer. These years leading up to your succession are also a great time to take stock of any knowledge gaps that may exist and bring the soon-to-be owners up to speed.

Even if you’re selling to an unrelated third party, there are still things to consider. As mentioned previously, you’ll want to ensure that you’re taking the right approach to optimize your sale price but also consider how much control, if any, you’ll want to retain after you sell.

3.  Securing a Healthy Retirement after You Exit Your Business

Whether you plan to travel the world, commit your time to community service or wile away your well-earned retirement tending to your garden, you’ll need money to live. If continuing in your desired lifestyle is directly contingent on the sale of your business, it’s important for you to maximize its value, even if that means delaying your retirement by a year or two.

These considerations and others are all factors that your financial advisor will weigh on your behalf as he or she devises your retirement plan. As part of the process, a business valuation will be conducted to determine what gap, if any, exists between the amount you need to live and the value of the business.

With enough time on your side, your transition team can even prepare a plan to fill the gap before you decide to exit your business.

Achieving a Successful Transition

Ensuring a successful transition of your business can be done if you prepare early and have the right professionals on your side. Creating a multi-dimensional team that includes experts in fields such as financial planning and business banking, as well as legal counsel, can help ensure that you not only transition your business successfully, but that you can live comfortably throughout your retirement.

About the Author

As the Senior Director of Business Owner Advisory Services at FNBO, Laura brings her experience working with business owners, and as a former member of a family business, to the Business Owner Advisory Services team. With an extensive background in business and estate planning, Laura is well qualified to help others plan for business transitions.