Given every business owner will exit their business eventually, a strategy is essential to avoid unnecessary costs and complexity. Creating an exit plan mitigates the risk of having to give up the reins unexpectedly due to illness or death and, with the right advice, can structure the business to make it easier to sell, pass on, or wind up without incurring undue costs or taxes.
An exit strategy can include succession to family members as well as selling the business, selling shares in the business, or winding the business up altogether. This year’s thinkBIG survey found that just 36 per cent of respondents had an exit plan in place, compared with 46 per cent in 2016. This may indicate a general lack of understanding about the value of planning.
We have identified six key steps leaders can take to prepare their business for an exit:
The earlier you plan, the more successful your exit is likely to be. It should account for your legal structure, funding arrangements, and whether you will continue in the business, as well as how existing employees will be provided for.
If selling the business, owners should do everything in their power to make it attractive, from keeping accurate records to being able to articulate what makes the business successful now and what will drive growth into the future.
The current market environment may not be favourable to a sale, or there may be mitigating factors that complicate the exit. For example, the business may rely on favourable terms from a supplier based on a personal relationship. If the owner leaves and that personal relationship disappears, the benefits may no longer be available.
There will be tax implications for business owners regardless of whether they sell the business outright, give it as a gift, establish a family trust, or remain an investor or partner. Business owners should seek professional advice to avoid a large tax burden when exiting the business.
thinkBIG 2017 found that nearly three-quarters of respondents believe their business has increased in value this year, despite only 29 per cent of respondents completing a recent business valuation. Knowing what the business is actually worth is important when negotiating a sale price. Valuing the business regularly lets owners build a picture of trends in the marketplace, which they can potentially leverage to time their exit and get a better price for the business.
When an owner falls ill or passes away without an exit plan, their business can fall into disarray or need to be wound up. This can create unnecessary distress for family members and dependents who must step in, often without a clear idea of what the owner wanted or where the business is headed.
Exit plans should be regularly updated to reflect changes in the business’s circumstances, with all key stakeholders aware of the exit plan.
Regardless of whether you plan to exit in the next few years or decades from now, it’s never too early to seek advice on an exit strategy. Structuring the business correctly now can yield dividends in the future, maximising its value.
Peter Saccasan, National Head of Business Advisory, RSM Australia