Exit strategy planning tips from the author of Walk Away Wealthy
July 25, 2016
During a one-on-one conversation with Mark Tepper, author of Walk Away Wealthy: The Entrepreneur’s Exit-Planning Playbook, Mark had two surprising and startling answers to my questions:
- When you should start exit planning? ? Answer: when you’re just planning or buying your new business.
- What difference does proactive exit planning make? Answer: Having an exit strategy for your small business could easily be the difference between needing to liquidate your company when you’re ready to leave or retire, and walking away with millions of dollars in your pocket.
Business owners want to exit on their own terms. But how can they make that happen?
The most important issues are:
- the amount of financial independence that a business transfer can give the owner
- who should receive or buy the business
Mark has offered his insight on these issues and more to The Wall Street Journal, Kiplinger’s, CNN Money, CNBC’s Squawk on the Street and Street Signs, along with FOX Business. He recently sat down with MP Star, as well, to discuss what successful exit strategy planning looks like for business owners.
A proven process for successful exit planning
Whether Mark is speaking to business owners in his book or in person, he always walks them through a seven-part exit planning process. Acknowledging that there is no “one size fits all” exit plan, he adds that this process, done correctly, really works.
- Step one: set exit objectives. What are your retirement goals? When do you want to retire? How much money do you need to meet these objectives?
- Step two: determine business value. Do you really know what your business is worth?
- Step three: increase business value. How can you increase the value of your company now so that it is worth more when you sell?
- Step four: third party sale. How can you sell your business without paying too much in taxes?
- Step five: business transfer to insiders. Do you know how to transfer your business to co-owners, employees or family members and still get cash?
- Step six: protect your business. What plan do you have, now, in case you die or become disabled before your exit plan is put into action?
- Step seven: protect your family. How can you provide that protection?
The importance of following the process
“This process is pretty cut and dried,” Mark says, “but it’s important to proceed in chronological order. People get impatient and often want to jump to step 4 [how to sell to a third party] when they really need to start at the beginning.”
He shares an example. “One client insisted on starting at step 4 but, when he started receiving lucrative offers, he realized that the legacy of this business – a family one – was too important to him to sell. Had he started at the beginning of the process, with self-discovery, he would have known that a successful exit, for him, wouldn’t involve a total and immediate sale of the business.”
Tailoring your exit strategy to your business
There are many exit paths and it’s important to choose one that fits both your mental and financial readiness. For example, someone who was reluctant to sell a legacy business, large or small, might:
- Sell 60 to 80% of his or her business
- Stay on for five years
- Sell the rest of the business after those five years were up
“This would give the owner,” Mark says, “an influx of liquidity twice: once at the initial sale and again at the total buyout. Plus, this arrangement would give the owner time to wean himself or herself away from the business more gradually.”
The argument for getting started early
It may take you five to ten years to make changes to your business structure to make it more appealing to buyers. As just one example, changing your business from a C corp to an S corp might make a significant difference in buyer appeal, but that can’t happen overnight.
So, Mark says, don’t procrastinate! “Start exit planning as soon as you possibly can, viewing your business as an investment, one in which you can build sustainable value that can be sold for a considerable amount.”
Mark personally knows of multiple instances when procrastination forced business owners into liquidating their companies when they could have sold it for a tidy sum with proper planning. Even if you run a small business, an exit strategy can make a big difference.
Other critical factors to consider
An intangible but nevertheless important factor to also consider is your likeability quotient. In other words, the more that people talk about you and your business in a positive way, the more the perceived value of your business might go up – because you’re more likely to get referrals from those who like you and your business. “We measure the reputation of a business,” Mark explains, “and come up with a net promoter score. We can then provide a verifiable score to potential buyers.”
Most businesses, surprisingly enough, are sold through an unsolicited offer. In other words, you’re at work, going through a typical day, when someone unexpectedly contacts you and asks you to sell your business. Would you be prepared to negotiate today if a good offer came to your attention? If not, then strengthen your business in the areas where you’re currently lacking. Don’t get caught off guard!
If you end up selling your business and you aren’t yet at a retirement age, you’re likely to start another business. After all, you’ve got an entrepreneurial mindset. “But,” Mark cautions, “invest only a small percentage of your new liquidity into this second business to minimize potential loss. Don’t over invest, early on.”
Wondering if your business is sellable today?
How far along are you in your exit strategy planning? What questions do you have? Leave a comment below.