Alex Ivy

Alex Ivy, CPA, CFA, is a partner in the Memphis accounting firm Frazee Ivy Davis PLC and a certified exit planner who provides business wealth planning, valuation and tax services to business owners and their advisers. Learn more at fidcpa.com.

The Business Owner: How to start your exit plan

By Updated: February 11, 2019 4:00 AM CT | Published: February 08, 2019 2:28 PM CT

If you own a private business, chances are you cringe at planning your endgame. How do you transfer your business – or even back off gradually or retire? It’s hard to get positive feelings about something so personal and financially charged.

The challenge is easy to understand. Dealing with everyday business is enough, and you want to avoid chaos, so you let it slide or play for time.

Most business owners sense some responsibility to exit properly, but many don’t know how to prepare the right path.

Start planning by shrinking the size of the project. Reduce it to three questions: Who? When? and How Much? These express your main exit goals and begin to slant the odds in your favor that you will ultimately part your business on your terms.

Who should succeed you? Your choice of successor is crucial, so think deeply. If at first you can’t name names, then just think in terms of four basic categories: (1) key employees, (2) co-owners, (3) outside parties, and (4) family members.

Many owners envision sale to an outside party as the only feasible path to money, but transitions to insiders and to family can yield greater rewards with proper plans and time frames. In fact, most businesses are transitioned to insiders.

As you reflect on possible successors, remember that each category has pros and cons. Some can offer cash up front, while others lack money or make you wait. Some are a cultural fit, others not. Some can be good bosses, others cannot. Some are suited to long transition times, while others expect your immediate retirement. Some require more tax planning, others less. Some get along with others, some don’t.

Also remember, if you don’t choose a successor then you might be left with a business that has no lasting value to key employees, to your family, your community, or a third-party purchaser. When the long run arrives, liquidation might be your only alternative. If you choose the liquidation route, do it thoughtfully and deliberately.

When do you want to step down? You should plan to step down only when you are ready and able. You don’t need to choose a specific date, but you should try to express a general time frame.

Decide how much longer you want to work. Decide if you are emotionally ready. Decide if you are financially capable of retiring or changing your work week.

Make sure the business, without you, is ready to show a continual supply of money, customers and management. When the business is ready, and you are ready, you can step down, but not before.

Because your time frame requires interlocking decisions, you must closely question yourself. Do you want out in 1-5-10 years? Do you want an active role in the business? Will you work until further notice? Do you want out now? Your time frame is essential to your exit plan because time is your ally only when you have it. Time is a main ingredient to most exit plans and it can ruin your hopes when it runs short.

How much do you need? This dives a lot deeper than “how much can I get for my business?” It’s about your retirement and whether your livelihood is dependent on your business.

Get professional help with fancy financial math, but here’s the general idea. First, customize your retirement budget, which should build in taxes, inflation, life expectancy, special wants, and negative surprises. Next, compare your retirement budget to the income your retirement funds and other savings can replace when you retire. Finally, if your investments can supply more than your budget, then you have all the money you need. Otherwise, you’re depending on your business as a retirement resource and you’re not financially independent without it.

Odds are you’ll need to maximize your business harvest, so figure out what your business is currently worth. You’ll need that current value benchmark so you can plan to grow from there and design proper funding of your days ahead. Get professional valuation help, be reasonable and don’t guess.

Plan to exit properly. Choose the people, the time and financial circumstances that should greet you at your destination. Then map the road and the obstacles.

<strong>Alex Ivy</strong>

Alex Ivy


Guest Column Small Business

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