Entrepreneurs create businesses with one eye on the future, imagining the day when they cash in on years of hard work by selling their business. Unfortunately, many of them never see that day. A management buyout may not be possible, the owner may end up unable to find, or attract, an arm's-length buyer or children expected to take over may be incapable or uninterested,.
This is particularly worrying for entrepreneurs, who tend to have a disproportionately high percentage of their net worth tied up in their businesses—in some cases as high as 80%. Obviously, planning for a successful sale is crucial. Even if you're in the early years of running your business and aren't considering selling for some time, here are four things to think about today that will help make your exit much easier down the road.
If not now, when?
Transition planning should be done over four or five years in order to ensure the most successful outcome, and the earlier it's done, the better. For entrepreneurs, who typically put in long hours taking care of day-to-day tasks, it can be hard to find the time to sit down and plan ahead. But consider this: demographic changes will push an increasing number of businesses onto the market in the coming years. How will you position your business to capture the attention of an arm's-length buyer? By starting the planning process now, you'll have time on your side.
Do you know what you want? Do you know if you can get it?
The value of your business is not based on what you think it is worth but on what the market will pay for it. If you need a certain amount of cash out of the business, you'll need to get at least a rough valuation as soon as possible. Then you can start to build value by identifying the true value drivers in your business and implementing an enhancement process. Thinking about this today gives you the time you'll need to identify strategies that will give you the most benefit and put those strategies into action.
How much will the taxman take?
Without effective tax and estate planning, you run the risk of ending up with less cash than you anticipated from the sale of your business. The decision to sell to an outside party will have an impact on your tax situation and should be discussed with an experienced tax advisor they can take you through your options and help you create a plan that minimizes immediate and future tax liabilities for all key parties.
Is there a roadmap to follow?
If you don't already have one, a business plan gives you a roadmap to guide you through the next one to five years. And getting into the habit of creating and updating your business plan will ensure that you have a viable plan in place when you do start approaching potential buyers so that they can see the potential for the business and have a guide to achieving that potential.
Dave Zimmel, CA, CPA (IL, USA), CMC, is a partner and vice-president of Private Enterprise at MNP.