Exiting a Business: What to Consider

The following article was provided by EPI Partner, Maus

When making the decision on exiting a business, it is important to consider the reasons for this transition. Some people will retire, some will take an extended holiday, and some will re-enter the workforce as an employee. Others will buy another business or establish a new venture.

Research shows that 52% of small business owners planning to exit their business intend to retire, and 14% intend to start another business. Business owners must think about the journey, not just the destination. Make sure health and wellness are priorities even in the building phase of the business. A strong, healthy body means a strong, healthy mind.

Industries and businesses are subject to economic cycles, and, at certain times, businesses will perform better or worse, depending on the business cycle. Ideally, a vendor should sell when industry conditions are good, but it is sometimes difficult to pick the top of the market. In many cases, industry cycles will be less important than personal reasons for selling.

Personal Expectations When Exiting a Business

In some cases, an entrepreneur burns out, faces illness, or is forced to exit a business for personal reasons. This results in a set sale date and/or a reduced price, which is not desirable. Like so many facets of business, the key to a successful sale or transition lies in careful planning.

Most buyers require the seller to have some involvement in the business after the sale to ensure the intellectual property, staff, and customer loyalty are smoothly transitioned. If a buyer considers a handover period too narrow, the perceived risk increases. This is reflected in the price on offer. It is important that the business owners factor into their exit plans a possible 12-24 month earn-out should the business sell to a strategic investor.

Should Personal Goals Take Priority When Exiting a Business

In some instances, the new proprietor will want the business owner to work in the business as an employee for an agreed period. The transition from owner to employee is not always an easy one. Relationships with other staff members need to be redefined and the seller is required to accept the changes made by the new proprietor.

When considering a business owner’s involvement after the sale, they noted that sometimes there are significant cultural differences. For example, if a small business is bought by a bigger entity, tensions often arise when a former owner needs to conform to the practices of a larger corporation. For the former owner, this can create a considerable emotional burden during the transitional phase.

It may be better for the vendor to act as an advisor or consultant to the business. In this case, the buyer draws on a thorough knowledge of the business operations and the industry and receives strategic advice. The advantage of this option is that it provides a regular stream of income after the sale, without the restrictions of full-time employment. This provides the seller with time to develop new hobbies or business ventures before exiting a business.

Who Are You?

Before embarking on this exit and transition journey, business owners should sit down and think about themselves. Who are you as a person? What are your values? Do you want to leave a legacy or reward, or take into account anybody else’s welfare when exiting? When you exit, will you retire, buy another business, work or volunteer? Other questions to consider include:

  • What hobbies or activities will you have?
  • What are your commitments with friends and family?
  • What study or self-development will you take on?
  • What investment projects, new business ideas, or revenue-making projects, concepts, or ideas will you take on?

What is Your Vision?

Sellers also need to consider their vision for the business. Most owners have an emotional attachment to a business. Their business is their ‘baby’ and is a part of their identity. They want the brand and the business to thrive after their departure. This means sometimes a certain type of buyer might hold more appeal.

Financial Considerations

Before exiting a business, a vendor must calculate how much money they need from the sale to sustain a desirable quality of life for the owner.

This is particularly true of owners planning to retire. Increased medical expenses and the future possibility of assisted living are considerations as well. There is a large percentage of business owners that have retirement income funds below the national average.

Many younger people sell a business to buy or start another enterprise. In these cases, it is still important that the proceeds from the sale are sufficient to fund a new business, maintain a happy lifestyle, and possibly have an extended break before starting a new venture.

Business owners also need to take into consideration whether the sale will leave them free to earn a living. Many buyers will insist on a restraint of trade clause in the contract. This restricts the seller for some time from starting a similar business. This can also restrict the seller’s ability to work for a competitor, disclose confidential information, or poach clients and employees. Include compensation for these restrictions in the sale price.

Time Considerations for Exiting a Business

Consider the scenario of a 50-year-old business owner selling his/her business for $877,000 after expenses and tax. If he/she earns 5% interest per annum and spends $84,000 on their lifestyle every year afterward, the cash runs out when the business owner is aged 65. Therefore, the business owner needs to consider spending less each year. Alternatively, selling his/her business for more or making the money work harder in an investment fund is an option. This assumes the business owner has no other personal wealth that will generate an income.

Maus Software Solutions

Maus helps business owners navigate the process of exiting a business and helps Certified Exit Planning Advisors keep their clients on task and on track for a successful exit. The Maus exit planning software suite has everything entrepreneurs and CEPAs need to run their businesses from financial analysis and strategic planning to exit and succession planning. Features such as exit planning automation integrate easily with software such as QuickBooks and Xero to make tracking progress, and identifying what is moving the financial dial, a breeze! Learn how Maus exit planning software has helped thousands of advisors and business owners grow serious value.

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