It’s not all too uncommon for business owners to delay exit planning because of their busy schedules.
Exit planning can also arise emotions of sadness or even guilt when strategizing how to sell a business.
However, if business owners don’t plan ahead, they could do more harm than good in the long-term.
As the famous saying goes, “If you fail to plan, you plan to fail.”
This saying also holds true to exit planning.
Here are 5 common exit planning mistakes and how you can avoid them.
1. Putting Off Planning Until it’s Time to Sell
Many small to medium sized business owners prefer to hold off on exit planning until it’s crunch time and they have to sell.
Often, they hold off on exit planning because:
- It could cause stress
- They are already so busy
- They might feel guilty or negative emotions
It’s also not always easy to think about selling a business, which often is one of the best appreciating assets, when things are going well.
Thinking about selling a business that’s performing well isn’t always easy.
However, you always want to be prepared for a potential offer, which is why it’s so critical to plan far in advance.
Strategizing an exit plan in advance will help you:
- Understand your company’s value
- Clearly decide your exit planning goals
- Help you better prepare for the business sale
- Already have your team of professionals in place
- Have prior knowledge of potential tax and liquidity implications
While you don’t have to plan everything tomorrow, it is important to start thinking about basics like your company’s valuation.
The best advice here is to start planning in stages.
Perhaps this could mean every quarter you sit together with your accountant and lawyer (as an example) and discuss some of your goals when it comes to exit planning.
Exit planning should be an ongoing conversation so that you are ready once it’s actually time to sell.
2. Failing to Proactively Search for a Deal
There are many times when a business owner’s best plan is to “wait.”
While it’s important to be patient, waiting for the best deal to arrive at your front door might not always be the best plan, either.
To compare, you probably don’t want to wait to win the lottery to go on your next vacation.
A better strategy than waiting for that elusive lottery win would be proactively working, saving money, and then going on your vacation.
The same thing applies to exit planning.
While there is a high likelihood that there is a close-to-perfect business deal out there, you will probably have to find it.
Here are some tips on how to find that deal of your dreams:
- Leverage your network
- Talk to local business leaders
- Talk to your existing customers (they may know someone!)
- Join national forums that specialize in your company’s industry
- Hire business valuation consultants and see if they can tap into their network
- Talk to your wealth advisor; perhaps they have a client or contact who is looking to buy a business like yours
In reality, there’s probably a pretty high chance that you already know someone who may know someone who is interested in buying your business.
You just have to proactively leverage your network and spread the word.
3. Not Knowing the Value of Your Company
Imagine signing up to a full-time job without knowing how much you should be paid for that job.
Not a good idea.
Similarly, you should never not know a rough valuation of your business.
You can’t navigate a roadmap without knowing where you’re starting, right?
Same goes for business exit planning.
To navigate the ups and downs of exit planning, you first have to understanding how much your company is worth – and whether selling your company actually meets your exit goal (ie., how much you want to be paid for your company sale).
Here are some ways to determine your company’s worth:
- Talk to a valuation expert
- Talk to people in your industry
- Review precedents of similar businesses that were recently sold
You can also use your annual income stream to estimate the value of your business currently.
This is called an earnings multiplier.
An earnings multiplier essentially determines the value of your company by multiplying your annual earnings by a certain number.
That number (or multiplier) varies, depending on your industry.
For example, some businesses sell for only 0.6 to 3 times their annual earnings.
Other businesses (such as online businesses) often sell between 30 to 50 times their annual earnings.
Know how much your business is worth, so you can seek out prospects who are serious about buying your company.
4. Not Understanding the Tax Implications of a Sale
Tax implications resulting from a business sale are a very important part of your exit plan, and you shouldn’t delay this.
This is a point where you should talk to your accountant.
And typically speaking, you may need to hire an accountant in addition to just your personal tax accountant.
Typically, you’ll want to find a business accountant.
You could find an accountant specializing in business transactions either by asking your personal accountant for a referral, or you could talk to your business valuation expert for a referral as well.
There are many different ways to structure a sale, such as:
- Installment payments over time – spread out your tax liability over several years
- One lump sum payment – pay taxes up front
- Rental agreement – whereby you sell the “value” of your business but keep the physical building of your company and rent that building to the new tenants so you produce a monthly income stream
While tax planning is a very integral part to exit planning, it should not become your focus.
That’s why you hire experts.
5. Underestimating the Amount of Time it Takes from Start to Deal Close
Closing any type of deal – especially when it comes to selling your business – will likely take a long time.
Especially if you’re selling your business for several million dollars, you should probably expect the transaction to take some time, especially if lawyers are involved (which they often tend to be).
On average, a business deal could take anywhere from one to five months, if not more, to close.
Always expect hiccups along the way.
Common reasons why deals may be delayed include:
- Inaccurate information
- Improperly reported financial statements
- Waiting to obtain bank financing from the buying party
That’s why it’s so important for you and your team of experts to stay on top of the fine print.
In the end, planning for your business exit strategy doesn’t have to be too complicated.
Since most people go through an exit planning process once in a lifetime, it’s natural to approach this stage with some uncertainty.
However, with the right people by your side and with some proper planning in place, you can skillfully navigate the obstacles that are thrown your way.
Fiona Smith is the founder of The Millennial Money Woman. She holds her Master of Science Degree in Personal Financial Planning and has co-founded a local non-profit community teaching financial literacy.