What’s Your “Get Out of Business” Plan?

Tim McDaniel | May 18th, 2012

You’ve worked hard to build your business and probably can’t imagine a time when it won’t be a major part of your life.  But, someday, you’ll approach retirement and you’ll want to spend more time enjoying your life and less time balancing your books.

Maybe you’ll want to leave your business to your daughter.  Maybe you’ll want to sell it and cash out.  Either way, business transition doesn’t just happen.  It isn’t serendipitous.  You need a “get out of business” or succession plan.

The first step in creating a succession plan is deciding how you want to get out of business.  As a business owner, you have the following options (listed in order of which usually produce the most cash):

  • Liquidation
  • Gifting to Family members
  • Selling to Employees or Family Members
  • Selling to an Employee Stock Ownership Plan (ESOP)
  • Selling to a financial buyer
  • Selling to a strategic buyer

Liquidation as a succession plan is easy to implement but does not produce the best return on your investment.   Your business is more than just the sum of its parts – sure it’s your buildings and inventory, but it’s also the good name that you’ve built in the community and the goodwill that you have with your customers.  Liquidation involves reducing your business to its component parts and putting a value on each of them.  But, you will lose the value of your intangible assets in liquidation.  On the plus side, liquidation is often the fastest and easy way to get out of business.  All other options will require significant planning and patience.

If you’re looking to sell the business as a whole, rather than its component parts, there’s more to consider.  Timing is the single most important factor in either selling or transferring a business.  If you do not believe this, ask any owner of a dot com or high tech business that did not take advantage of any offers they received before the bubble burst.

But, you can’t always predict swings in the market and some factors are beyond your control in the optimal timing for selling a business.  These include: economic conditions, interest rates, industry trends and buyer activity.  Selling a business isn’t just about trying to time the market; it’s about timing your business.  The absolute best time to sell your company is when your business’s estimated future cash flow is peaking and the risk related to the business is at its lowest level.

All too often, when owners are thinking about retirement, they start winding down their business.  They don’t pursue that big new client or launch that new product line.  Once owners start to mentally “check out” so does their estimated future cash flow, which lowers the price for which they’ll be able to sell the business.  If you’re looking to sell, make sure to remain fully committed to keeping your business healthy while you shop around for perspective buyers.  A little extra effort now could mean a much bigger payoff in the future.

But, it’s not always about maximizing value…  If your strategy is to gift your stock to the next generation, it’s best to do it when the value of your business is at its lowest and when the tax laws are most favorable.   For many business owners, that time is right now.  Values are down due to the recession and the gift tax law may never again be as favorable as it is in 2012.  Since there are annual and lifetime gift tax exemption limits, a gifting strategy needs to be timed and planned.

Setting a definitive strategy early will assist you to take advantage of the optimal timing for either selling or transferring your business.

Contact our Ohio business planning professionals

Picking a business exit planning strategy and knowing how to get started on it can be difficult.  Luckily, this isn’t a decision that you have to make alone.  Contact Rea & Associates.  Our Ohio business planning team will evaluate your situation and help you pick a plan that makes sense for you.  With professional business planning help, your business can continue its smooth sailing into your retirement and beyond.

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