By: Srbo Radisavljevic, CFP®, CEPA®
As a business owner, how do you know when the time is right to exit your business and transition into the next chapter of your life?
When it comes to timing there can be a lot of factors at play, but like most things, the longer you have to plan the better off you’ll be. Here’s a checklist of things to consider.
Set Clear Goals
Take some time and think about your objectives. Do you want to sell your business in the most tax efficient way possible? Are you hoping to pass your business on to your children? Maybe you want to start a new business after selling the current one. The important thing is to decide, because goals determine strategy and an effective strategy leads to success. While strategies vary depending on the objective, one thing that’s consistent is the need for lead time. Give yourself five to ten years to implement a solid plan.
Assess Readiness
For many business owners, work consumes all their energy. If you’ve spent the last few decades working 50, 60, or 70 + hours a week, it will be hard to stop cold turkey and it will take time to cultivate a different mindset. One way to do that is to start thinking in realistic terms about how you’ll you spend your time once you retire. I would encourage you to get granular. Whatever you imagine yourself doing in retirement – playing golf, going to the gym, volunteering, or spending time with grandkids, write down how many hours a week you think you’ll spend on each activity. See if that number matches the number of hours you spent working. Don’t wait until you retire to make the list. For business owners whose only interest has been work, this exercise gives you time to cultivate some new interests in the lead up to retirement. Have fun with it – make a bucket list. Remember, this is your reward for many years of hard work.
Health & Lifestyle
The age you choose to retire at has a major impact on planning, with the most obvious one being that the earlier you retire, the more money you’ll need. But retirement has distinct phases, and how much you spend and what you spend on, will vary over time. The first phase of retirement will be your most active, so it’s important to budget for that. As you age, some expenses, like travel will probably decline, while spending on health and wellness could increase. Your planning should take these changes into account. A clear-eyed approach provides for a more realistic allocation of funds and lowers the chances of getting blindsided by the unexpected.
Financial Health of the Business
Don’t make assumptions about the value of your business. If you are relying on your business to fund your retirement you need to know it’s true value constantly work to and maximize it. That means doing things like maintaining accurate financial reports, building a strong team, and having processes in place so that it’s turn-key ready.
Economic Environment
Imagine a scenario where you know when you want to exit your business, but as that day approaches, the economy slumps into recession and lowers the value of your business. You can’t control market forces, but you can take steps to protect yourself from market variability. That requires a flexible plan that allows for swings in the economy or industry-specific disruptions.
Business Lifecycle and Growth
Simply put, a business that is growing has more value than one that’s not, so you want to time your exit to show steady growth. This can be a challenge because the closer you get to exiting your business, the more tempting it can be to let things go. This is where having good processes in place can make a difference. The more your business is able to function and thrive without your direct involvement, the better.
Tax Planning
We all know the tax code constantly changes, so it’s important to stay current on the impact of recent changes. For instance, when you launched your business, it may have made sense to operate as an LLC, but subsequent changes in tax law might make it more advantageous to operate as a C-corp. Reviewing your structure is especially important as you plan for exiting your business. If you intend to sell to a third party, whether it’s a stock or asset sale, your choice can also have major tax implications. Just keep in mind that taxes are incredibly complex and you want to avoid getting blindsided by unexpected consequences.
Financial Planning
An experienced advisor helps you pull all the pieces together. They work with you to identify your goals, strategy, timeline and can help you assemble a team who can provide accounting, tax and legal expertise. Your financial planner will also help you monitor progress, make adjustments to your plan when necessary, and help you stay on track.
Conclusion
Every business owner needs to keep in mind that someday they will exit their business. Planning for it now gives you options for a well-timed exit that achieves your goals. If you have questions about timing your exit and how to prepare for a smooth transition down the road, contact KRD Wealth Management. We provide business owners with the guidance and expertise you need create a plan that fits your unique goals and situation.
