Planning Your Exit Strategy

  • Assess your needs before retiring from your business.
  • Consider the alternatives, including a private sale, transfer to a family member or bringing in a strategic partner.
  • Create a tactical plan, from transfer of management to transfer of ownership.

What is an exit strategy?

Have you begun to think about retirement? If you’ve spent your life building a business, retiring may not be an easy prospect. Small businesses don’t always have company-sponsored pension plans and unlike people whose investment portfolios contain a number of different stocks and bonds, many business owners have the majority of their funds invested in one thing — their businesses. This makes it much more complex to plan for generating future income when a business owner is ready to retire.

By spending your energy on planning your exit, just as you did to build the business, you are more likely to fully realize the value that has taken a lifetime to build.

An exit strategy involves developing a plan to pass on responsibility for running the company, transfer of ownership, and finding a realistic way to turn the value of the business into cash that the selling owner can use and invest.

Developing an effective exit strategy includes planning for the transition to new management. Because a stable or growing business is worth more than an unstable one, creating a successful transition is essential to maximize the owner’s investment. This requires planning while the company is in good economic health.

Assess your needs

The first step for creating an exit strategy involves assessing your needs. Some important questions include:

  • Have you identified a family member or trusted employee who is fully prepared to manage the company when you retire? Does this person have sufficient financial resources to buy the business from you? If not, you may want to consider selling your business to maximize value and avoid a crisis.
  • Will other factors, such as relationships with other shareholders or changing market conditions, play a role in your business’s future? Disagreements with other shareholders or risky market conditions will affect what you can actually achieve.

The cornerstone of any exit strategy is learning what your business is worth. Your company’s value isn’t necessarily its book value. Many other elements play a role. Having a professional valuation can be a good start. At the same time, it is important to understand that your business may have a different value in the eyes of various buyers.

Look at your alternatives

Depending on the results of your needs assessment, you can then begin to explore alternatives for your exit. Depending on your situation, you may be able to:

An infographic that says Planning you exit strategy. Alternatives: 1.Make a private sale. 2. Pass on to a family 3.Employee stock ownership plan(ESOP) 4.Sell shares back 5.Bring in a strategic partner 6.Go public
  • Sell the business to a third party. Consider a variety of possible buyers: current management, a customer, a competitor, or a private investor. Determine if the sale could work as a cash deal, a leveraged buyout, or an installment sale. Be realistic — a potential buyer may not be able to write you a check. It could take time to achieve the level of liquidity you want.
  • Pass on to family members. Parents often want to give ownership to a child, or children. But can you afford to do this? If you have saved sufficient assets to fully fund your own retirement, a gift or bequest could work (but be sure to get professional advice about estate and gift taxes). However, in many cases, it will not be realistic for owners to retire unless children buy the business from their parents.
  • Sell your shares back to the company. If you have other partners, you may be able to structure a buy–sell agreement so that the company or other shareholders will buy back your shares when you are ready to retire. But having an agreement alone is not sufficient; you also need to consider how remaining owners will generate the cash needed to make those payments to you.
  • Bring in a strategic partner. If you still have time before retirement, bring in a strategic partner. If you are willing to share ownership and control with another person, a partial sale may provide you with the liquidity to diversify your investments now. It may also provide you with a potential successor.

Once you have evaluated your alternatives, you will need to create a tactical plan. Consider everything from the transfer of management to the transfer of ownership, to cash flow projections and financing.

Get the most from your business

If you are facing retirement and own a business, now is the time to begin creating an exit strategy. By spending your energy on planning your exit, just as you did to build the business, you are more likely to fully realize the value that has taken a lifetime to build.

A Financial Advisor can help you assess your needs, evaluate the options, and work with your team of tax and legal advisors to identify and take appropriate measures now. Please contact your Financial Advisor with questions you may have about your retirement strategy and how it coordinates with the exit strategy you create with your team of advisors. We welcome the opportunity to help you get the most from your business.

Next steps

  • Start early by assessing your needs and likely successors, if any.
  • Consider obtaining a professional business valuation.
  • Review your alternatives, including a private sale, transfer to a family member or bringing in a strategic partner.
  • Develop a plan for transition and share it with those involved.

This material has been prepared for informational purposes only. Wells Fargo Advisors and its affiliates do not provide tax or legal advice. Please consult with your tax and/or legal advisors before taking any action that may have tax and/or legal consequences and to determine how this information may impact your own situation.

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