[Recording] The Entrepreneur’s Roadmap to Retirement Part 2: Plan Your Exit Strategy
As an entrepreneur, you likely have a vision for your business. However, you may not have thought about your end goal. In other words, do you want to eventually exit your business and retire? If your answer is yes—or even maybe—you’ll want to ensure you’re financially prepared for your transition from business owner to retiree.
In this three-part blog series, we’ll be sharing what you should be thinking about and when as you approach retirement. In our previous post, we emphasized the importance of leveraging a qualified retirement plan to supplement your liquid assets in retirement. Part two focuses on developing a plan for your business exit strategy.
#2: Plan Your Business Exit Strategy
When: 5-10 Years Prior to Retirement
According to the Exit Planning Institute, recent studies show that 66 percent of entrepreneurs and small business owners plan to exit their businesses in the next 10 years. However, of those businesses, only 20 to 30 percent that go to market will actually sell.
These statistics are not meant to discourage you if you’re planning to eventually sell your business and retire. You may already have a succession plan in place that includes transferring your business to an insider. If so, you don’t have to worry about going to market. Still, it underscores the importance of giving yourself adequate time to plan your exit strategy and ready your business for sale.
Step #1: Assess Your Readiness
This question not only refers to your mental and emotional readiness to retire but also—perhaps more importantly—to your financial readiness. Have you taken the time to calculate how much money you’ll need to retire comfortably? If not, this is a good place to start.
In our last post, we discussed using rules of thumb or tracking your spending to come up with an estimate of how much money you’ll need in retirement. You can also work with a financial planner to calculate this number and determine, realistically, how far you are from reaching it. The important thing is to establish a timeline for when you want to and can retire. Then, you can prepare your business and personal finances accordingly.
Step #2: Identify Your Potential Exit Paths
Generally speaking, small business owners have seven business exit paths:
1. Transferring your family-run business to a family member;
2. Selling your business to one or more key employees;
3. Implementing an Employee Stock Ownership Program (ESOP);
4. Selling your share of a partnership to another partner(s);
5. Selling to a third party;
6. Retaining ownership but becoming a passive owner;
7. Closing up shop and liquidating.
To determine which of these exit strategies makes the most sense for you, you’ll need to ask yourself a few questions. For example, do you have a capable successor within your business? Are potential successors willing to invest the time and money to grow your business? If you have children, will you treat them equitably?
You may not have answers to these questions yet, and that’s okay. Still, you’ll want to start having these conversations sooner rather than later. The more time you give yourself to plan, the more options you’ll have when you’re ready to retire.
Step #3: Run the Numbers
Lastly, if you don’t know the current fair market value of your business, you’ll want to obtain a professional appraisal. This will help you determine which exit paths are available to you. It will also highlight potential opportunities to increase your business’s future sale price.
On average, a professional appraisal can cost anywhere from $3,000 to over $30,000, depending on who you engage and the scope of the valuation. So, it’s important to do your homework beforehand. You’ll want to ensure you’re getting the information you need within your budget and can trust it.
Knowing your business’s potential market value is a good starting point for structuring the eventual sale of your business. It also allows you to estimate the potential tax consequences of each option, which can be meaningful. Most importantly, it will help you eliminate certain exit paths if they don’t meet your financial objectives at retirement. For example, if your successors don’t have the resources to buy you out, selling to a third party might be a better option for you.
You don’t have to make any final decisions at this point. However, developing your exit plan will help you clarify your objectives, assess your current resources, and show you viable options for selling your business.
The Entrepreneur’s Roadmap to Retirement Part 3: Transition From Business Owner to Retiree
Next on the entrepreneur’s roadmap to retirement is beginning your transition from business owner to retiree. In the meantime, Oak Capital Advisors can help you determine where you are on your path to retirement relative to where you want to be. Request a free retirement assessment to get started.
In addition, check out our recent episode of The Charleston Entrepreneur Podcast, 7 Exit Strategies for Charleston Entrepreneurs, to learn the pros and cons of each potential exit path.