John Brown in his excellent book on exit planning uses a seven step process for planning your eventual exit from your business. His seven steps overlap several areas of wealth management for the private business owner:
- Establishing Owners Objectives Financial Planning
- Establishing Business Value Value World Analysis
- Building Business Value Value Creation
- Selling to a third party Value Harvesting
- Transferring to Management or Family Value Harvesting
- Developing a contingency plan for the business Risk Management
- Family Wealth Preservation Planning Wealth Transfer
Planning for a successful exit involves working with advisors who have an interdisciplinary understanding of what needs to be done for a successful exit.
But first, the main question
One question that must be answered before any other: Should I keep the business and operate it as a cash generating machine or should I sell the business, change my day to day activities and live on passive income from the capital value I realize from my business? Or, to put it simply, should I keep or sell the business? If I sell, to whom should I sell and by what means?
The keep or sell question will help you concentrate on the appropriate sections of a wealth management process that helps you achieve your goals. Remember, all the advisors you work with during this process will have an agenda and you will need to drive your agenda and make sure you are working towards the outcomes that are important for you.
The sales process
Suppose you as a business owner have decided that you want to transition out of your business. If you have created a business with enterprise value (a business that someone else wants to own) you have several options as to who will be the next owner.
The three main options are sale to an outsider, sale to your managers or passing the business to family members. In many cases you will want to examine all three at the same time before making a decision.
Understanding value worlds
Private businesses have several market values at the same time. The difference in those values can be huge. For example, the liquidation value of a business might be $500,000 while the strategic value of the business might be $5,000,000. It is a critical part of the exit planning process to understand the different value worlds and how they fit in with your long-term personal economic plans.
We suggest that you value your business based on three or four different value worlds. This will help you make a more intelligent decision about which channel you will ultimately pursue when it comes time to transition out of your business.
The advisory world
When selling your business we believe its crucial that you use outside advisors who understand the process. These advisors should have the ability not only to help you through the process, but also should have a clear understanding of the different sales opportunities you have.
It is rare to find an advisor who understands and is conversant in all the transfer methods, so it is all the more important that you as the private business owner stay in control of your goals. This means you first need to be clear about what you want out of the transfer and then stay true to that as you go through the process.
Selected tools:
S Corporation Recapitalization
Stay Bonus
Phantom Stock
Articles
Using Deferred Compensation to Sell Your Business
Seven Steps to Leaving Your Business in Style
Four Ways to Leave Your Business
The above tools, techniques and resources are listed as examples. Your Stage2 Advisor will work with you to identify the right strategies for you depending on your specific life goals and financial goals.