Are you expecting to sell your business one day and retire on the proceeds? Or does retirement seem so far off that you haven’t even thought about it? Whichever situation you find yourself in, if you haven’t created an exit plan for how you will leave your business, you could be putting your financial future, your employees and your business’s health in jeopardy.
A study by Securian Financial Group found that many small business owners are so busy running their businesses, they haven’t even started the exit planning process. This was true even among business owners who planned to leave their businesses fairly soon. One-third of the small business owners in the study planned to exit their business in the next five years, while 60 percent planned to do so in the next 10 years. Despite that, more than 60 percent of small business owners have no exit plan in place, and aren’t even working on one. Only 24 percent had developed an exit plan.
Although 30 percent of respondents believe they’re “indispensable” to the business, more than half of the respondents do plan to sell their businesses, either to a partner, a key employee or a third party. But even among those with plans to sell, few were making formal exit plans.
Asked why they haven’t started developing a plan, 30 percent said they were too focused on growing the business; 30 percent said they are “indispensable” to the business; 18 percent said there are no qualified candidates to take over the business, 15 percent said they have no time to plan and 15 percent said their family is not interested in taking over the business.
Why do you need an exit plan?
- You never know when illness, a family emergency or personal circumstances will force you to leave your business. Without an exit plan, you could be forced to sell the business at a loss or even close it down.
- By developing an exit plan early on, you will have time to build value in the business to ensure it meets the goals set in your plan. For example, if your retirement depends on selling your business for $500,000, creating an exit plan well in advance gives you time to work with your financial advisors, such as your attorney, accountant and a business broker, on measuring your business’s current value and improving it to meet those goals.
- If you plan to have family members or key employees buy you out or take over the business, developing a firm exit plan gives them a sense of security that they know what is going to happen. Knowing that you really plan to leave and what they need to do to purchase the business will motivate them to work harder to achieve those goals.