Kozak Financial Group
October 10, 2023Money Education Financial literacy Lifestyle Entrepreneurs Women & wealth Professionals
Exiting a business, the right way
If you are a small business owner, you know that your hard work in building, growing, and optimizing your business has been both difficult and rewarding. Most entrepreneurs spend so much time focused on the growth and optimization stages of their business that there is little time to think about their exit strategy. Every entrepreneur is different, so the right succession plan for you might not be identical to your peers. Typically, you have three options available: shifting management to the next generation, selling the company to an existing business partner or employee, or selling the business to a third party.
If you are in the fortunate position of running a family business with a clear line of succession in place, many of the decisions have already been made. You know who the buyer is, where the business will go from here, and you likely know how much involvement you can expect to have after the sale. What you might not know is how you intend to get your equity out of the company. Some parents would prefer their child gets a loan to buy the company outright, therefore encouraging the child to work hard at paying down their own obligations.
Other families might be more comfortable in a “rent-to-own” type agreement that allows for the child to pay their parent for the company over a specified period. This is essentially a self-financing strategy and should be treated as such. In either case, combining family dynamics with business decisions can be complex. As best as you can, try to separate the money side of this relationship from the family side, so that you can avoid talking about valuations or the fairness of the deal at holiday dinners.
Handing off control to a trusted employee or business partner can make for a seamless transition for your clients and other employees. Typically, if you have a business partner, you would agree on the value of the business, and therefore negotiations on price may be more straightforward. Unlike with family members, it makes the most sense for this to be a straight buyout deal. Some business owners might forgo some of the upfront payment in favor of preferred stock in the company that entitles them to future revenue. This gives you the ability to participate in the ongoing growth of your company but would reduce the upfront payout you would receive. You would need to assess your own risk appetite in a situation like this; do you trust your company and employees to continue successfully without you?
If you don’t have a built-in succession plan and intend to sell your company outright in the open market, you should expect a longer process. Potential buyers will need to vet your financial information and do their own due diligence before paying you cash for your company. Since this is all sensitive information, it is recommended to have the potential buyers vetted before they get access to your company’s information. Many accounting firms offer business sale and valuation services for smaller companies and would be able to evaluate potential buyers before they get access to your financial information. Commercial banks would be interested in assisting you, but at much higher valuations. Typically, annual revenue in the business would need to range in the tens of millions to qualify. In any case, selling a business in the open market is somewhat like selling a piece of real estate, each buyer and seller has their own idea on what the value should be. Successful negotiations will see both parties agree on a price, payment terms, financing and any other necessary terms.
No matter what your business succession plan looks like, it is important that you start planning early. Better to be prepared for your eventual exit than to be rushed into it. The Kozak Financial Group has helped coach many clients through the sale of their own businesses and assisted them in turning their hard-earned sweat equity into an investment portfolio that funds not only their retirement, but their family’s legacy as well. The transition from business ownership to portfolio management can be a stressful one. In our experience, it is best to take it slow when investing the funds from the sale of a business. Stepping into the market over time gives you the opportunity to ease into investing.
Our approach to generating income to fund retirement has helped countless business owners transition from running their companies to a successful retirement. You can learn more about our group by visiting our website: www.kozakfinancialgroup.ca or by calling 403-260-0568.