Selling your business is a milestone, both personally and financially—but it also takes a well thought out plan to maximize the sale proceeds and to prepare yourself personally for the business exit. The more time the business owners have in crafting and executing their business exit plan will result in a higher probability of them to achieve their desired outcomes. Understanding the different time factors at hand and how to plan accordingly is crucial to a successful business exit.
What are the more common types of business exit paths?
According to the 2023 National State of Owner Readiness Report conducted by the Exit Planning Institute, 69% of business owners said an exit strategy is on their priority list. Planning for your business exit is a key part in getting the most value and liquidity for your business. There are many different exit paths you can use to sell your business:
- Selling to an employee
- Selling to a family member
- Selling to a third party
- Selling to an ESOP
Working with a team of financial advisors can help you decide which of these options is best for your business and can also help you determine how to best position your business for sale based on when you plan to exit.
What can a business exit team do for you?
When you meet with your business exit team, you will first discuss goals for your business and personal finances. This can include how much income you need for your retirement and to consider the impacts of selling your business on meeting those financial goals. Using your business to help pay for retirement can be a leading factor in your decision for a business exit. Having an end retirement value goal with a team of trusted advisors helps define your destination, so you can make the goals a reality.
A business exit team is a strategic benefit for many business owners. This team of advisors can act like the architects of your business plan, meaning they bring fresh eyes to see the strengths and weaknesses of your business and help you optimize and maximize your business’ full potential. Working with a trusted team means you will have advisors who can support you through the different life cycles and stages of your business, which includes minimizing any potential roadblocks as well as a plan if any do arise.
What to do 10 years ahead of a sale?
According to the 2023 National State of Owner Readiness Report conducted by the Exit Planning Institute, 75% of business owners would like to exit their businesses within the next 10 years. If you are one of these business owners, one of the first questions you should be prepared to answer is who is going to buy your business. It could be an employee, a family member or a third party. Understanding your end buyer will be crucial to establishing the most value for your business. Next, you need to understand the true value of your business. Most business owners need to sell for a minimum price to ensure they reach their retirement goals. Planning for your financial future during retirement years should be a critical first step in understanding how and when you could sell your business.
Once you have the first few questions about your business exit strategy answered, you will need to look at the financials of your company. The strength and health of your business will greatly determine the value at which you can sell.
A 10-year time horizon gives you a chance to strengthen any financial metrics or parts of your business that need attention. A trusted team of advisors can also use this long-time horizon to plan how to minimize taxes for you at the time of your business exit. The beauty of a long-time horizon and working with a full relationship team is that you can access liquidity needed to continue growing your business before the intended sale—further maximizing the value ahead of your business exit.
What to do five years ahead of a sale?
Many of the questions above can still apply to your business if you are five years away from a sale. Your time horizon will be a little shorter, which could mean you aren’t able to achieve all your goals, but it is always better to plan—even if it is a shorter window. Five years ahead of your sale is an important time to establish your leadership team for the next generation. A team with tenure who will stay with the business after you sell it can be more attractive to a potential buyer than a team that is brand new and doesn’t fully understand your business.
Five years ahead of a sale is also a crucial time to ensure your financials are solid and that a growth plan is in place. This is when you can rely on a forecast, so you know your business is strong going into a sale, as well as whether a sale would help you meet your retirement goals.
What to do three years ahead of a sale?
Three years ahead of a sale is mission-critical time. This is most likely the least amount of time you have to put forth a solid plan to optimize the value of your business and after-tax proceeds. With a three-year –time horizon, you can put quarterly or monthly goals in place to strengthen or grow your business.
At this stage, frequent check-ins on your business are key to ensuring you are efficiently positioned to sell your business.
Ultimately, it is important to be working with a team of trusted advisors who can support you through all the different life cycles and time horizons for the sale of your business. Put your business first and assemble the right collaborative team that can help you achieve your financial goals.
Bryan Esarco, VP, business planning solutions at UMB Bank.
