As much as planning for retirement can be a complex and confusing process for working Americans, it’s a whole other ballgame for those who are small-business owners. Not only do they have to manage their company’s day-to-day operations, develop and meet their sales and business goals, and provide for their employees, they also have to figure out what will happen to their business when they’re ready to move on.
It’s no mean feat to develop a business exit strategy while in the midst of running that business, but it’s a key piece of any small-business owner’s financial plan, according to a group of experts who spoke as part of a recent MarketWatch panel discussion on financial strategies for small businesses. The discussion, which took place at MarketWatch’s San Francisco office, was moderated by Robert Powell, editor of MarketWatch’s Retirement Weekly.
“When people are starting their businesses, there’s not much at risk,” said Richard Stone, a certified financial planner and chairman of Private Ocean Wealth Management in San Rafael, Calif. But when they’re ready to retire, “Everything is at risk because they’ve now accumulated arguably the largest asset they will own,” he said. “It hurts a lot more to make a mistake when you’re at the end, because it’s determining whether or not you will have a successful retirement plan for you and your family. It’s really important that you make very, very smart decisions about this as you’re ready to exit.”
It can be tough to think about an exit strategy when your business is young and just getting on its feet, but it’s still a crucial component of financial planning, added Frank Paré, a certified financial planner and founder and president of PF Wealth Management Group LLC in Oakland, Calif.
“When you start a business, you’re very excited about the start,” he said. “The last thing you think about is: ‘I’m starting this business only to walk away in, say, 20, 30 years.’” Think about your long-term goals now, Paré said. Ask yourself: “Am I putting in place the processes, the structure that’s going to allow me to grow this into a business versus growing it into a job?” he said.
“Once you have that mind-set in place, then it helps you to further develop this exit or succession plan. ‘Do I want to sell this business? Do I want to ultimately walk away from it and have my employees take over?’” Paré said. “What is my exit strategy down the road, and what does that look like in terms of a time frame?”
Research confirms the fact that creating an exit strategy isn't top of mind for many small-business owners. Even though 60% of small-business owners said they expect to leave their business within 10 years, more than 60% of owners said they don’t have an exit plan in place, while another 16% said they’re working on a plan but haven’t finished it yet, according to a survey by Securian Financial Services Inc., an investment advisory company.
Just 24% of small-business owners said they’ve created an exit strategy, according to the online survey, which focused on companies that had been in business an average of 18 years and had an average of 13 employees. (See the survey here.)
The process can take time, Stone said. “I’ve been working on it for seven years,” he said, citing his experience developing an exit strategy for his own business.
“You’re going to be looking at it from the perspective of your own personal financial plan [and] how your exit will affect your family as well as your customers and employees,” he said. As you near retirement age, one problem with neglecting an exit plan is that your employees may get nervous. “If they see there is confusion on your part about what it is that you want to do and how you’re going to hand it over and who you have thought about for a successor, that is not a healthy environment for the business,” Stone said.
“Pretty soon you’ll start seeing attrition. Key people will say this looks too chaotic for me,” he said. “By not planning in advance you can actually be diminishing the value of the greatest asset that you possess.”
Here’s the good news: After you deal with the cumbersome tasks of putting a value on your business and getting your books in order, you will have improved the value of your business. “Its value has gone up because their books are in order, they have the process, the operations manual, all of these things in place — so that someone buying it can see that it’s just a matter of stepping in,” Paré said.
What’s Your Plan?
At its most basic, your exit strategy entails a choice between two options: Close the doors, or sell your business. The former is generally the result of failing to plan, said Tim Kochis, a certified financial planner and founder and president of Kochis Global, a San Francisco-based firm that works to foster the growth of financial-advisory services in developing countries.
If you’d prefer to sell your business rather than just letting it die, then you have some more questions to answer. “Do you sell it to a competitor? Do you merge the business into another business in the same industry? Do you sell it to your employees? Do you sell it to a wholly new owner who wants to come into the business?” Kochis said.
Your next step is to understand and assess the value of your business. Too often, people fail to understand what drives their business’ value, Kochis said. “The value is coming from the customers or clients of the business and from the employees, the staff, the people who are actually making it work,” he said.
“The more attention you pay to what’s going to be good for the customers of the business and for the staff on an ongoing basis, the more valuable that business will be, the easier it will be to actually find a buyer, whether the buyer is internal—selling to employees—or whether the buyer is some external party,” Kochis said.
One option is to sell your company to your employees. “That is typically not the highest value generator for the owner of the business — in order to make it affordable for the employees it does need to be discounted somewhat,” Stone said.
Still, there are ways to structure a deal that will work out for you and your workers. For example, “If you can structure it with some retained interest going forward, you can benefit from that future appreciation by having a motivated workforce,” Stone said.
Ready for more information? According to MetLife Solutions Group, a subsidiary of MetLife, there are some key questions for small-business owners to ask themselves as they develop an exit plan, including who will step in to take over the business, when will you leave, and what lies ahead. (Read their quick guide on “orchestrating an exit.”) Also, check out the extensive resources on exit strategies aggregated on the website of the Small Business Administration.
Andrea Coombes is a personal-finance writer and editor in San Francisco. She's on Twitter @andreacoombes. This article originally appeared on MarketWatch.com and is reprinted by permission from Marketwatch.com, ©2014 Dow Jones & Co. Inc. All rights reserved.