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How to Exit Different Sized Businesses

‘Exit Planning’ is the process that a business owner follows in preparing for the largest financial and emotional transaction of their life – i.e. the transition of their privately-held business to a new owner. Now, despite the fact that ALL owners will one day leave their business, it is true that different sized businesses will have different exit options available to them and, therefore, owners need to know where they fit on the exit planning transfer spectrum as well as how to begin your exit planning today. The Exit Planning Transfer Spectrum The exit choices that are available to privately-held business owners are largely dependent upon the size of the business.  In our case, we’ll generalize by measuring the size of a business both in terms of revenue, the number of employees, and annual profits.  The Exit Planning Transfer Spectrum below will assist you in seeing where you fit. The Exit Planning Transfer Spectrum Solo Micro Lower Middle Mkt Upper Middle Mkt Revenues (millions) $0- $1m $1m – $5m $ 5 m -$30m $30m – $150m # of Employees 1 to 5 5 to 15 15 to 50 50 to 200+ Annual $$ 50k to 350k $350k to 800k $ 800k to $2mm $2mm to $10mm It is important to note that these size ranges by revenues, number of employees and annual profit are generalizations, not evenly applicable to every business and industry.  This transfer spectrum is intended to help you calibrate where you fit in terms of the size of your company and how you can devise a plan for an exit.  So let’s look at each segment to see how different sized businesses...

Owner Preparation for a Future Exit

Owner Preparation for a Future Exit An owner’s exit from a privately held business is a complex process that impacts nearly all of the people and other constituents associated with that business. As a result, many owners will not execute on an exit plan until they have a high level of comfort with how and when this large change will affect them and the people involved with their organization(s). The purpose of this newsletter is to address the types of things that owners can do in anticipation of a future exit to attain a higher level of comfort with many of the unknowns that accompany an exit strategy and implementation process. Where Effective Leadership Intersects with Personal Desires and Goals When an owner begins to consider how and when they will exit their business, they often face the dilemma of putting themselves ahead of their company, employees, vendors, customers and anyone else associated with their organization. This is often difficult to navigate because, at some level, the leadership skills that made the owner successful to begin with – such as putting other’s needs ahead of their own (i.e. employees, customers, key business relationships, etc.) – now creates a feeling of conflict when deciding to plan an exit. The owner must face the necessity of putting himself or herself ahead of everyone else, which frequently proves to be difficult. In fact, owners beginning this process often say, “My family comes first, but my employees and company are a very close second.”  Therefore, in order to strike a balance in how an exit will impact all of the different people, the...

Planning an Exit Requires a Relationship, Not a Transaction Mindset

For business owners who are thinking about exiting their business in the near (or not so near) future, there are many things to consider to assure the business transition happens in a smooth manner.  Owners are wise to seek the counsel of advisors in this complex and delicate area.  While discussing an exit with a professional advisor, owners are well served in asking how the advisor that they are speaking with perceives their role, as well as, how that advisor is compensated.  This newsletter makes the argument that in order for this process to go smoothly, owners should seek out the counsel of ‘relationship-based’ advisors in favor of ‘transaction-based’ advisors to create and begin implementing a multi-year exit planning process. Understanding an Advisor’s Role in an Owner’s Life Advisors enter a business owner’s world mostly on a reactive basis, usually because there is a need for assistance with an outstanding issue.  For most owners the relationship with their accountant is the most consistent and often the most trusting in the realm of financial issues and that is simply because state and federal governments require, at a minimum, that businesses – and their owners – file their taxes each year.  This is, again, a reactive (albeit very important) approach to the process of finding an advisor. However, some business owners buck this trend and actually take a proactive approach to working with their advisors, including a commitment to planning for the future. These owners recognize the importance of ‘staying one step ahead’ and they seek out the best advisors for their short-term and long-term needs. The Relationship-Based Advisor versus the...

How Much of the Future is in Your [Exit] Planning?

Small businesses – those with a few million in revenue to approximately $50 million in revenue – are often run by their founders.  And because these founders were generally experts in their fields before they were tasked with running an enterprise they tend to incorporate less planning in their businesses.  Rather, these owners often set the strategic directions of their businesses in an ad hoc manner, incorporating various techniques to drive their businesses while mostly setting the direction of the business with their instincts.  The purpose of this newsletter is to emphasize the importance of seeing into the future with your planning – particularly with your exit planning. The Planning Process, Generally Speaking Generally speaking, the process of planning for a business’ future is all about setting the direction for the enterprise with the best knowledge and inputs available today.  The planning process is not only about forecasting the future, it is also about gaining focus and consensus amongst the team that assists the owner.  Done properly and consistently, the planning process for a business provides direction, communication, alignment of resources, and a plan for executing on the initiatives set forth in the plan. The Six and Twelve Month Plans While the planning process is about looking into the future, it is a matter of how far into the future any owner can see that is the greatest challenge.  While the visibility of a business’ future is often difficult to see beyond the immediate 24 to 36 months, it is important to look beyond these more obvious planning dates when planning an exit.  For example, an owner may be...

How Does My Readiness for an Exit Impact My Options?

The path that an owner follows in leading their organization through a successful transition to another owner is a personal process.  Owners will not exit / stop working in their businesses until they are truly ready to do so and when an owner understands what they are trying to achieve as well as their readiness to achieve it, they are making great progress towards a successful exit. This newsletter is written to assist owners with interpreting their goals and readiness for an exit and then understanding which exit options may be most appropriate for their situation. An Owner’s Readiness for an Exit Drives the Best Options All business exit planning begins and ends with what an owner wants most combined with how well prepared they are to execute.  For example, an owner may want his key person to take over the business in the future.  Well if there is a risk that the business will not survive in the hands of the key employee, then that owner will certainly want to first know how dependent they are on the business’ future success and income, i.e. that owners’ financial readiness for an exit.  In this case, if the owner has sufficient assets and streams of income outside of the business, he or she may not need to worry about the future success of the business (at least from a personal, financial perspective).  More often, however, owners are not ‘ready’ for this transition because they are, in fact, dependent upon the future success of the business to fund their lifestyle. By contrast, an owner who is ready to leave the business...

Family Business Exits and Transfers Pitfalls to Avoid – Five (5) Additional Issues

In this series of newsletters on family business transitions, we address five (5) additional issues, which we call pitfalls, that should be considered when building a plan for your exit and the transfer of the business to family members.  Transferring a family business from one generation to the next is a delicate process.  Focusing on these five (5) additional areas should increase the success of your overall business transfer and provide you with a more successful exit. I. Trying to give everyone an equal share Where multiple children (or other related family members) are involved, it is often the case the parents want to treat the children equally.  While this is a nice idea in theory, dividing your business equally may not be in the best interest of your business. Remember that the management of a business and ownership of that same business are separate issues and should be considered and handled in their own, unique ways. For example, it may be more fair for the successor(s) you have chosen to run the business to have a larger share of business ownership than family members not active in the business. Or it may be best to transfer both management and ownership to your chosen successor and make other financial arrangements to benefit your other children. Many exiting owners try to focus on the notion of being ‘fair, but not equal’ amongst the children, knowing that trying to keep everything equal may actually prove to be more unfair in the end. II. Not adequately preparing the transfer for a potential audit  For preparing the transfer of ownership to the next generation,...

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