Exit Planning 101: What Do You Do When It’s Time to Go?

How do small business owners successfully get out of their business when the time comes?

There are nine possible ways to leave a business, and several alternative deal structures that can help the process be successful – even in difficult markets or industries. I won't go into each in detail.

What’s important to understand is that owners have more options than listing with a business broker or planning a liquidation event. And with each combined exit method and deal structure, the value of the result that we term as cash-to-the-seller changes.

The most effective exit will be accomplished by beginning purposeful planning at least three years in advance of a proposed sale or retirement. Reasonable results can sometimes be obtained in a shorter period, but the owner’s goal should be maximum value, maximum exit opportunities, and minimal cost.

These three desired outcomes require additional time to accomplish. Reduce the time available to plan and, as a result, owners begin to remove or reduce one or more of these desired outcomes.

Existing exit programs and many advising professionals often focus on tax strategies or supplemental investment or risk vehicles when tasked with exit planning. Important to the exit process, but business improvement, repositioning, and deal structure can provide far more cash-to-the-seller than tax strategies can save.

Owners generally operate with two goals in mind. First, maximize the annual financial benefits they or their family received in various forms. Secondly, they are counseled to effectively reduce tax obligations to their lowest level – even to the point of showing an operating loss.

These strategies can have a significant and negative impact on business value when the owner decides to sell. Owners can’t accept that they have actually been destroying their own business value. If not corrected, the business will not command or support the price they “think” they should be receiving.

It doesn’t matter how much work and effort they have put into building their business. It doesn’t matter how it started or how many years it has taken to find success. Buyers are only willing to pay (and banks finance) in today’s dollars, the discounted value of future earnings adjusted for perceived risk. And the buyer or a professional decides on the level of risk present, not the seller.

Another complication for owners is that they really don’t want anyone to know they’re considering leaving their business: employees, suppliers, customers, competition – even their lender. They resist talking with the professionals who could help them. They wait and they put off making a decision until time is against them. They hope for the best all the time playing a part in further reducing their odds of success.

If you would like to confidentially discuss planning a business exit or succession event, contact me, Odee Ingersoll, at 308.865.8344. You can learn about a nationwide exit program to assist small business owners and learn if your business would qualify to be accepted into the program.

Contributed by Odee Ingersoll, Director of the Nebraska Business Development Center at the University of Nebraska Kearney. Reach him online at ingersollo@unk.edu.