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Developing a Viable Exit Strategy

General Business News

February, 2010

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Developing a Viable Exit Strategy

We spent a great deal of time last year discussing how to start and grow a business, but what happens when you want to slow down or retire? Unless you have developed a workable exit strategy, you could be in for a rude shock when it’s time to leave, as many in the accounting industry have discovered when approaching their own retirement.

Another term for developing an exit strategy is succession planning. It is the process whereby one generation of business ownership/management determines when and how to pass the baton to a new generation. It is important to note that generation in this context does not refer to age, but rather to a new ownership group.

In order to develop a viable succession plan, current management/ownership must first identify what life cycle the business is in. Is the company young and just getting off the ground? Is the business in a growth phase or has it reached its maturity? Knowing the company’s current position will help identify its needs if current management suddenly becomes incapacitated.

Once you have a clear understanding of where your company stands, you must then develop a vision of where it is headed. This is critical if you want the company to support the buyout of your interest by future owners. With a firm vision in mind, you can begin to position a new management/ownership group to take over when you retire.

There are a number of exit strategies you might consider:

Close the Doors
This is where you simply sell the business assets and go home.

The Buy-Sell Agreement
You and your partner(s) agree on a fair price to pay when one party wants to leave the business.

The Family Sale
With this approach, you simply pass on the ownership/management of the business to family members through a sale of your interest in the company.

The Third-Party Sale
Another company or unrelated individual purchases your ownership interest.

Employee Ownership
With this strategy, you sell the company to one or more key employees, perhaps even to the entire employee group.

The Drop Dead Strategy
Believe it or not, there are business owners who expect to work in their business forever and do not take time to develop a plan to ensure business continuity. This is not a viable or desirable exit strategy.

Except for the Drop Dead Strategy, there is a common thread running through all of these exit plans: you need to have the right people in place to carry out the transition. This means you need to recruit your successors early in the life cycle of the business. Then you must create a development plan to help them reach their full potential and design a compensation plan to retain them. It’s unlikely you’ll keep everyone you recruited to form the backbone of the company once you leave, and that’s why it’s crucial to begin your talent search early.

There are other key ingredients that are necessary in order for you to exit your company when you are ready. These ingredients include a business model that works; an industry for which there is a product demand; and a buildup of customer satisfaction/loyalty. Furthermore, successful implementation depends on having seasoned managers who will help guide and build the business along with you.

So, do you have a good exit strategy? Take a look around you and ask yourself, “If I left today, would the business continue?” If you can answer “yes” to this question, congratulations! You have positioned your company to move into the future. If you are uncertain or your answer is “no,” give us a call and let’s talk about your next steps.

Have a terrific February.

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These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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