All business owners will exit their business at some point, either through planned or unplanned circumstances. However, there are certain events that could thwart what should be an otherwise hassle-free business transfer.
Why Exit Planning is So Critical to Business Owners
When business owners explore new opportunities, planning to retire or stumble upon certain financial troubles or health risks, they may be compelled to sell their business. Hence it is crucial for business owners to have an understanding of the actual worth of their business, which often becomes a starting point for the initial discussions with a prospective buyer regarding the sale of the business, should any of these events come to pass. Exit planning advisory is largely influenced by a reliable and independent business valuation. It provides a valuable insight into ones business’s actual worth, enabling the business owners to make life-altering decisions to secure their own and their family’s financial futures.
An exit usually has several high-priority implications on the company’s structure, assets, employees and tax obligations.
A smooth and successful business transition requires a well-rounded exit plan. Regardless of whether that transfer is internal (management team, shareholder, partner or next of kin) or external (independent third party), crafting an exit plan well in advance is critical for the business as well as the interest of business owners.
According to a study conducted by the Canadian Federation of Independent Business (CFIB), approximately 50% of business owners do not have an exit plan in place, 40% have an informal plan and only 10% have a formal written plan.
If you fall in the former category and are hesitant to draft an exit plan, these are likely the reasons holding you back.
1. The Timing Isn’t “Right”
Most business owners assume that it’s too early to begin planning their business exit. The rule of thumb? It’s never too early. Ideally, exit planning should occur at least five years prior to the fact, given that there will always be plenty of issues that need sufficient time to address. Although five years can seem like an eternity, it provides business owners the time to truly leverage tax and capital improvement opportunities available to them. You need time to identify your exit plan (whether internal or external), plan your finances and ensure that the right tax structures are adapted to minimize taxes.
2. There Are Other Pressing Obligations That Demand Your Attention
If you think you’re too busy to create an exit plan right now, well, it might not bode well when it comes time to execute it. A hurried and ill-thought out exit plan could have detrimental implications. A great start is to make your plan top priority. Ensuring a smooth and successful transfer to the next generation or ensuring that you receive the maximum possible premium when you sell to a third party is important – or should be!
3. The Perceived Complexity Puts You Off
Sure, exit planning might seem very complex at the outset. What helps tremendously is relying on the expertise of exit planning and valuation specialists (people who have a proven track record and the credentials to show for it) to guide you through the process. You could also refer to the many resources out there to help draft an initial plan and then corroborate that with colleagues, partners or other business owners who have gone through the process themselves. When equipped with sufficient knowledge and the right support, making the first step isn’t quite as daunting!
4. The Perceived Expense Puts You Off
Just as with anything worthwhile, exit planning is a necessary investment and one that should be accommodated in your wealth management budget. Similar to how you invest in portfolio management services, exit planning stands on equal footing. It is recommended that business owners should invest approximately 1% to 2% of their business’s value every year on exit planning efforts. Besides guaranteeing that your affairs will be in order for your retirement, it also ensures that you’re maximizing your business’s value and minimizing tax liabilities prior to the transition.
5. There’s a Sentimental Attachment to Your Business
You’ve painstakingly built your business from the ground up and, quite understandably, have a vested emotional interest in it. Contemplating an exit plan and the eventual sale of your business might not be a savoury topic although it is unavoidable. Especially if you want to exit the business on your terms and not have to sell it at a discount or deal with liquidation as a result of poor business choices. It’s crucial that you set your business in good stead while you still have control. That way, you won’t be cruising into your retirement, plagued with the fear of the unknown as far as your business is concerned.
Don’t be a part of the 50% who haven’t formulated an exit strategy. And if you need help, just ask!
Let Us Help Create an Exit Plan That Works For You!
At VSP, we assist you in creating an exit plan that bodes well for your financial future. Call us at 905-305-VSPL (8775) today to add value to your exit planning efforts.