What’s Your Exit Strategy?

You’ve probably heard it before – a business is like a baby.  It takes so much work to give birth to a company and get it through the early stages.  Finally, it grows up and becomes sustainable.  You’ve done the hard work and can now enjoy a successful company while doing what you love.

The baby analogy doesn’t stop there, but many business owners do.  This “baby” has grown up and its owners now need to think about what happens as the business or they age.  What will happen to the business if they become disabled or die?  Are they planning on selling the business when they retire or passing it on to a trusted relative?  If they have a partner or partners, how does the company operate if something happens to one of them? 

One of the most important strategies for success when buying an investment is knowing what your exit strategy is.  The same holds true for business.  Successful business owners need to plan their exit strategy long before they need to use it. 

So what are these strategies? 

Retirement

You have a successful business and are planning to sell it when you retire to help fund your retirement.  This is a great idea.  Think through the details.  How is your business valued?  What are the chances there will be willing buyers?  What if there is a recession and no willing buyers when you want or need to retire?  Will a sale mean your customers can still get the service/product they used to get and how important is this to you?  Are you looking for a lump sum or a trail of payments over time?  Will you have to provide funding for the buyer so that she/he has the capital to get started?  There are a lot of variables in this scenario.  I recommend to all business owners to actively save for retirement and not depend only on the sale of their business to fund their golden years.  There are many vehicles you can use such as SEP and SIMPLE IRAs as well as 401(k) plans and cash balance plans as well as others.  Find out the advantages and disadvantages of each and start or continue saving now so that you don’t have to depend on a successful sale as your only means of retiring. 

Risk Management

So much of a small business is wrapped up in the people who build it.  You have worked hard to grow your reputation and you draw customers because of it.  You’ve been smart about business decisions along the way and the success of your business shows because of it.  How is your business affected when something happens to you and you can’t run it for a while?  Maybe it’s pneumonia and your doctor has ordered bed rest.  Maybe it’s a more serious ailment and you have to take a leave of absence for half a year.  What will happen to your business, your customers, and your income?  Maybe you have a partner who can take on what you’ve been doing.  Will the company continue to earn as much as when you were involved?  What will happen to your income?  

A 20 year old entering the workforce today has just over a 1 in 4 chance of becoming disabled sometime before they retire (Council for Disability Awareness, Disability Statistics 2013).  Whether or not you have partners, learn about disability insurance to replace your income if anything keeps you from working.  If you do have partners, plan with them for how you or they will manage if any one of you is disabled.  If you don’t have partners, think of how your company will survive your absence for however long you may be unable to work and how you will re-integrate when you are able to work again. 

Succession Planning 

A succession plan is your retirement plan with a twist.  We all hope to live a long life and retire with enough years to enjoy pursuing other interests.  But what happens if we die before we get to retire?  A business owner’s succession plan includes both a normal retirement and an unexpected death.  It addresses questions like: What will happen to those who depend on your income?  What will happen to your clients?  Will your business survive your passing?  Are any partners prepared to do what you’ve been doing? 

If you have partners, a smart way to structure your plan is to cover each partner’s life with a business insurance policy.  The business will receive the death benefit and your partners can use that to buy your part of the business from your heirs.  This allows your heirs to receive income and your partners to own the business entirely.  If you don’t have partners, there are also buy-sell agreements you can structure with another similar business to buy your business if you unexpectedly pass and vice versa.  Again, usually an insurance policy and a contract is involved to provide funds for the purchase of the business.  There are many different ways to structure these agreements.  Spend time now thinking about your priorities such as income for your heirs, taking care of customers, having your business survive you, and then talk with legal and financial professionals who can put together a plan to fit your goals. 

In the same way a good offense starts with a good defense, a well-built business starts with a planned exit strategy.  Give your business and those you care about the benefit of planning ahead while you have the chance to make choices.  

Kristin Michel Rodriguez

Ms. Rodriguez is a Financial Planner and Advisor with Symphony Financial.  With over 15 years of experience in the financial field, she helps business and personal clients plan to achieve their goals.  She enjoys working with businesses to find optimal ways to maximize their retirement savings for owners and employees.  

Symphony Financial 
2275 Research Blvd., Suite 500 
Rockville, Maryland 20850 
703-865-4092 
www.symphonyfinancial.net

Registered Representatives. Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representatives, Cambridge Investment Research Advisors, Inc. a Registered Investment Advisor.  Cambridge and Symphony are not affiliated.