Pew Research shows that, as of the third quarter of 2021, 50.3% of U.S. adults 55 and older said they were out of the labor forces due to retirement. If you’re one of the 55-and-over cohort (21%) of the nation’s population, a business owner, and considering retirement, then you need to know you’re leaving your business in good hands. The process of preparing for your departure from a company, regardless of the reason for that departure, is called exit planning. Because you are a company owner, your exit from the business carries enormous consequences for that business and the people who work for you. Here’s how to ease that transition.
When someone establishes a company, he or she focuses on building the business, earning an income, and serving clients. The deadline for leaving the business usually isn’t foremost in one’s mind. Because most service-oriented businesses start small, very small, the company owner is responsible for everything from administration to customer acquisition to accounting to customer service. As the business grows and the entrepreneur hires people to fulfill the company’s increased clientele, it may become difficult to relinquish control.
Especially if you intend on selling the company to fund your retirement, it’s imperative that the company not depend upon you for every decision. This requires delegating both responsibility and authority to key employees to keep the business running in your absence.
Identify those key positions and make sure that competent, trustworthy employees fill those positions. Train those employees to do what you need them to do and how you want them to do it. When you’re confidentof their performance, test their independence by taking a vacation.
An extended vacation not only helps you determine whether your management team can carry the load in your absence, it also serves as a trial period for you to experience retirement. Can you handle the lack of a daily routine?
Document Processes and Procedures
How often have you fallen into the trap of thinking that if you need something done right, then you have to do it yourself? Do your employees think that, too? The problem with such an attitude is that deep corporate knowledge stored inside an employee’s mind leaves when he or she leaves. There’s nothing to fill the vacuum, except trial and error, panicked and exasperated staff, and frustrated and disappointed clients.
Document all standard operating processes and procedures and make them accessible to anyone on staff who may have need of this information. This is one way to preserve company knowledge and transfer it to new hires.
All processes and procedures should be broken down into easily replicated and followed, step-bystep instructions so anyone sliding into that job or position can do the job. While blatantly acknowledging that no one person—not even you, the owner—is indispensable to the business, ensuring that corporate knowledge is documented, updated, and accessible prepares your staff for sudden changes should an unexpected absence occur.
Resolve Outstanding Issues
Is your company involved in litigation? Are there outstanding accounts your company cannot pay or which certain clients have postponed payment? Are there concerns regarding staff morale or any certain employee’s performance?
Issues that have a negative effect on the company in terms of performance, litigation, revenue, income, or customer satisfaction damage the company’s appeal to an outside investor or buyer. One powerful way to reveal the issues bringing your company down is a business valuation.
A business valuation examines and assesses every critical aspect of the company and identifies its strengths and weaknesses which are then further analyzed for guidance on how to capitalize on them, improve them, or remove them. The business valuation also determines the company’s current market value, which is the amount for which your company would sell if you sold it that day. That amount usually comes as an unpleasant surprise to the business owner whose attachment to the company led him or her to an inflated estimate of its market value.
The first time the business valuation determines the company’s current market value it sets the baseline value. Further analysis of the owner’s financial requirements after departing the company establishes the amount the owner will need to fund retirement. The difference between the baseline value and that future retirement-funding amount is called the value gap.
Closing the value gap means rectifying those issues that repel prospective buyers. These include:
- Excessive dependence on the owner for daily operation
- Ongoing litigation
- Sloppy recordkeeping (this makes it appear you have something to hide)
- Subpar performance of a business unit or department
- Untrained personnel
- Obsolete or marginal equipment
- Customer concentration (the business relies on too few customers for its income).
Resolving outstanding issues that damage your company’s appeal to prospective buyers may mean downsizing your workforce, replacing equipment, broadening your customer base, jettisoning unprofitable business units, and other decisions and actions that may be difficult to implement.
Give It Time
The general process of preparing a company for its owner’s exit and probably for sale focuses on building its value so buyers and owners come to an agreement on price and the proceeds adequately fund the owner’s lifestyle after departing the company. This means the company must be operating at optimal capacity independently of the owner’s daily involvement when the owner is ready to leave. It must have built a revenue model in large part sustained by recurrent income, such as contracts and subscriptions that facilitate continuing business with long-term clients. It must have a workforce whose efforts align for the continued prosperity of the company and all its stakeholders. It must minimize and mitigate activities and influences that chip away at its value.
These requirements take time. You need time to examine the company’s current status and analyze it. You need time to develop goals and an action plan to achieve those goals. You need time to benchmark progress to keep efforts aligned toward those goals and adjust where necessary if something isn’t working out. You need time to execute those action items and review their results.
Depending on the company’s and the owner’s readiness, exit planning typically takes 18 months to five years to implement and achieve the desired value for the company. This means you need to start earlier to find out your company’s market value. The more that must be rectified and the larger the gap between the company’s current market value and the value you need to fund your retirement, the more time you’ll need to build that value to fund your retirement.
Only once your company has reached the magical value should you put your company on the market. The process of marketing the company to buyers, identifying prospective buyers, and negotiating the sales contract may take another year or more.
Get Expert Help
The entire process of planning and executing your graceful exit from business not only take time, it takes a team. This is one area of business in which it’s better to hire expert assistance than it is to go it alone. Selling a business and retirementcarry legal ramifications you may not be prepared to navigate. It involves myriad details that catch you by surprise. It diverts your focus from the business of running your business, which could have dire consequences for the whole value building exercise.
Having a team of experts to know what information you need, to help you analyze that information to work with you to prepare an exit plan, and to hold you accountable for progress in completing the plan enables you to focus on doing what you do best: your business. Many consulting firms offer the services of exit planning advisors who will help you fulfill your retirement goals. Look for a Certified Exit Planning Advisor to guide you.
If you want to secure your company’s future and your workforce’s continued gainful employment, exiting your company takes years. Set your deadline for retirement and work backwards to determine how long you have to maximize your company’s value and leave it on the best possible terms for the new owner, the employees, and yourself.