Be Proactive: Avoiding Exit Planning Mistakes
The foundation of an Exit Plan relies on extensive planning and solid implementation. At the cornerstone of a functional Exit Plan, your job as the business advisor is to guide the business owner so that the business can live on after the owner exits.
For small-business owners, retirement planning is not as simple as saving a certain amount of money in a retirement account. A significant part of retirement planning is Exit Planning, which involves creating a strategy to transition out of the business while maximizing its value.
So, what can you do to set your client up for success when exiting their business? First and foremost, you should help your client create a timeline for the exit process. This timeline should include both short-term and long-term goals, such as:
- When the owner plans to retire
- How long it will take to transition out of the business
- When the new owner will take over
Additionally, you as the advisor should help your client establish a plan for handing off the business to a chosen successor. This plan should include an:
- Overview of the business
- Organized financial review
- Assessment of the business’s strengths and weaknesses.
Next, you should help your client review their financial documents, such as their balance sheets, cash flows, and income statements, to ensure that they are up-to-date and accurate. With the right planning and guidance, your client can successfully transition out of their business and maximize its value.
Guiding your business-owning client throughout the Exit Planning Process is essential to a successful exit. Due to differing business exit strategies, many business owners fail to plan for the exit of their business, or make mistakes when planning their exit strategy.
In this blog post, we will discuss tips to overcome the most common mistakes small-business owners make when planning their exit strategy.
Tip 1: Proactivity is Key
Many small-business owners start planning their exit strategy when they are already close to retirement age. However, Exit Planning should start long before retirement. Business owners should invest in building a strong culture, optimizing processes, and building revenue from day one. This will not only make it easier to leave when the time comes, but it will also make the business more valuable to potential buyers.
It is important for business owners to assess how well a potential hire's values and work ethic align with their own during the recruitment process. Generous training, pay, and benefits can also show hard-working employees appreciation and create a healthy culture. This is especially true for key employees as they are an integral part of the value drivers for the business.
Streamlining operational aspects of the business can help increase the value of the business to potential buyers. Business owners should also work on expanding their product or service offerings or increasing the markets in which they do business to create a diversified revenue stream. In a previous blog post, we dive into Proactive Business Advising.
Tip 2: Identify a Business Successor
Selling a company is not the only way to exit the business and retire. Business owners should consider having a trusted business partner or family member take over the day-to-day operations of the business. This can help create a family legacy and ease the transition for the business owner, which can satisfy the non-financial goals of many business owners.
However, it is important to make this plan clear well before retirement to allow time to train and coordinate with the successor. Check out our blog post for helpful tips on Selecting the Best-Suited Successor to the Business Owner!
Tip 3: Become Indispensable
Building a business model around oneself as the central component can delay retirement and make it harder to transition the business to someone else. Business owners should empower others to take their place as often as possible. This could include being more of a mentor than a boss, memorializing policies and procedures, and delegating tasks appropriately. If the majority of the business value is with the owner directly through knowledge and client relationships, the business itself won’t be valuable to another owner.
The Bottom Line
In conclusion, it is never too early for your clients to plan for a business exit. Developing a plan to transition out of the business doesn't have to be a stressful process. It is important to make sure that the successor is properly trained and given time to adjust to the new role.
Additionally, business owners should become more of a mentor to empower others to take their place and should document policies and procedures to make the transition easier. Planning for retirement may seem daunting, but it is essential for the future of the business. By avoiding these common mistakes, small-business owners can maximize the value of their business and ensure a smooth transition out of the business when the time comes.
Help your clients create an internal transition team to help with the process. The team should include members from different areas such as finance, operations, and marketing. This team can help to identify any areas of the business that need to be addressed prior to the transition.
Furthermore, create a timeline for the transition and create a list of goals that need to be achieved to share with the advisor team. With clarity around the goals and expectations of each member, you'll ensure that your client’s transition out of business is as smooth and successful as possible.