When Should You Start Planning Your Exit
Updated: Nov 30, 2020
This is a question many business owners wait too long to ask. I've had many business owners tell me they do not expect to start planning until the last eighteen months to one year before they plan to exit. Unfortunately, waiting this long to begin planning severely limits your options. Many exit strategies require much more than eighteen months to successfully implement. The honest answer to when the best time to start planning for your exit is now.
Every business owner knows that things rarely go according to plan. Starting early allows more time to overcome unforeseen complications when they arise (and they will). Furthermore, many of the steps required to ready your business for sale, are sound business practices you should implement regardless of when you plan to exit. Practices like, budgeting annually and measuring performance against your budget, regularly reviewing your buy-sell agreements, having written processes and procedures that enable easy training and cross training of staff, putting together a solid management team that can run the firm in your absence, aligning performance measures and compensation with key business objectives, and diversifying your customer base. These are just a few things required for a successful exit that will help your business run more efficiently and effectively today.
The sooner you understand what your ideal exit will look like, the sooner you can start working towards that end, and the higher probability you will have of successfully achieving it. Starting earlier gives you time to increase the value of your business. Regardless of your preferred exit strategy, many of the processes, procedures and documents required to increase the value of the business at sale are good business practices to implement right now. They improve your performance and ensure the survival of the company long after your departure. However, many of these can take a while to fully implement. For example, it may take several iterations to find which key metrics best align performance with your business's strategy. Hiring, training, and grooming the next level of management to fill in for you and your partners will take years. Diversifying your customer base can likewise take a while depending on how large your biggest customer is and the condition of the market and your industry. If you are considering an outside sale, you will want to show three to five years of consistent growth and a track record of your business setting growth goals and achieving them. This is not something that can be done in the last eighteen months.
That all relates to the business itself, but it is important not to neglect you, the seller. It is imperative you ensure that you can reach your financial goals upon the sale of the business. Many owners assume that they will have enough proceeds from the sale of their business to retire. This is an assumption that should be analyzed carefully. You would not want to sell your business successfully only to discover that you are still far short of your financial goals for retirement. You would have to find a new job, drastically scale back your retirement standard of living, or both. To avoid this, you must calculate the minimum amount you will need to sell your company for to achieve your desired lifestyle at exit. This process should consider your current savings and savings rate, expected market returns until exit, your expected expenditures after exiting, etc. Ideally you will have enough saved to completely cover your retirement expenses without needing any proceeds from the sale of your business. This is often not the case though, which leaves you dependent on the successful sale of your business to achieve your financial goals. The sale of your business is a one-time event, and can be affected by things that are far beyond your control such as market conditions, your industry, your health, etc. Placing most of your financial future on a single transaction is a big risk. It is much better to plan far in advance and build your retirement plan in a tax-favorable manner over many years to reduce the amount you need to get from your business sale at exit.
If you have business partners, you need to be sure they are also involved in these processes and reviewing their own financial plans. You and your business partners must communicate frequently about the business and your respective exit goals. You cannot shy away from having hard conversations with each other. It is not uncommon for business partners to have goal misalignment when one or more of them exit. The goal is to minimize the conflict and not destroy the relationship, or worse, the business. Clear, frequent, and open communication are essential to preventing this.
One last, and very important, point is this: You are not 100% in control of when you exit your business. Accidents happen. Illness can strike suddenly. Market conditions for sale can peak or dip without warning. A strategic buyer may knock on your door tomorrow. Laying the groundwork now to ready your business for exit will strengthen it overall, increasing not just its value, but its survivability should something happen to you or the economy.
Control the controllables as the old adage goes. With exit planning, starting sooner is always better than starting later. Work on the things you can control: save for retirement in a structured and tax-favorable manner; lay out sound business practices and position your company to operate without your involvement; communicate and coordinate between you and your business partners. Planning for your exit can seem overwhelming at first. There are so many factors to consider, and most business owners have never done it before. It leaves many owners sleepless at night wondering if they are doing it right and praying their deal goes through. It does not have to be this way though. Get in touch with Augelli Consulting, LLC. We will help guide you and your partners through the detailed NAVIX exit process. We work with you, your partners, and your current legal, tax, and financial planning advisers to create a detailed plan and help you execute it. Together, we can ensure you exit successfully and achieve your dreams for retirement.