Most owners of successful businesses know that it does not happen without planning, hard work, and a little luck. Yet, most have no exit plan for leaving their business.
The idea that your business will provide you with income after you are no longer there may not be a reality. You have to depend on yourself. To have a successful business, you must plan for an exit strategy that covers death, disability, divorce, and departing.
Death: The issue of the death of a small business owner should be considered during the start-up of a business. Unfortunately, during the creation of many buy/sell agreements the issue of death is only addressed at the urging of a life insurance agent. At the meeting, you arbitrarily decide how much insurance you can afford and how much your company is worth, when in fact you do not know.
Disability: Death is not as likely to end the business relationship as disability. Small business survival will often take prescient over paying a disabled partner. If the person is important to the business, the financial strain impacts the business and the family who depends on the income.
Divorce: You can imagine the torn feelings if a disability occurs, but what if the partners cannot get along? How do we split a partnership without financially ruining each other? It may be complicated by many personalities, some may not even be a part of the dispute, yet may be affected financially.
Departure: You may all be happy working together, but your partner or you may decide to leave for another opportunity or simply to take life easier. Who is going to do the work? What is owed the leaving partner? Where is the money coming from? All important considerations for your business exit strategy.
A Comprehensive Buy/Sell Agreement
For the small business owner, each one of the above scenarios has special demands on: family, income, taxes, and transfer of control of assets. An agreement, commonly called buy/sell agreements, can be used to handle all. The concern of the family or income can conflict with the business. The business exists as a separate entity. Reduce conflict by developing mutually fair agreements and the desired level of income.
Creating a Business Exit Strategy
When creating an exit strategy, include the following:
- consider incorporating your small business to legally recognize yourself and your business as separate entities
- find a method of determining the value of the corporation that can be done at least annually and will qualify under IRS standards
- develop an employee benefit plan that will assist with the departure of each partner in case of death, disability, or retirement
- plan for who retains company ownership and who gets paid off
The great American dream is to: build a business of your own; bring it to life; and make it successful. How you plan your small business exit strategy will determine your financial success. Just as building a successful business takes planning, hard work, and a little luck, so does leaving it.