Reasons to Transition a Business
There’s a reason why we see the term ‘exit strategy’ so often in the financial media. It’s a euphemism for selling—or cashing out. Successful business people almost invariably have one. Those without an exit strategy frequently get burned.
The point is to plan carefully for the future. Several of the reasons to transition a business, like death and disability, might be sudden events. But you can still plan for them—so that when the time comes to transition, you, or your successors, are prepared.
Ready to retire
The word on the street is that retirement is vastly underrated. If you’re considering selling your company to retire, you should make sure you can afford to do all the things you envision. This means making a painstaking projection of your future income needs, then comparing this with the income you can realistically expect from the sale of your company.
Seeing the opportunity to sell at the right price
It does happen. Someone walks in the door and wants to take your business off your hands at an attractive price. If the market is working in your favor, the timing of a sale could be something you should move on quickly. You should think this possibility through in advance—being aware of the market and your business’s attractiveness to potential buyers—so you’ll have an idea of the resources you’d need and will know what to expect.
Boredom—or interest in starting a new business
Burnout, boredom—or daydreaming about your next start-up—are all writing on the wall: You’re probably due for a transition. But that doesn’t necessarily mean you have to sell your business. Depending on the kind of business you’re in, you could consider one of these options:
- Bringing in partners
- Merging with another company
- Going public
- Hiring a manager to take on all or part of your current role
…. But it may also just be time to sell and move on.
We all know that selling in a down market—or when your business is struggling—means selling low. If you see greener days ahead for your business, and have the financial wherewithal to hold off on selling until the timing is better, you probably won’t regret waiting.
But if the negatives you’re contending with have more to do with partner disputes, you could consider hiring a negotiator to see if you can turn things around. If you can’t come to terms, then selling your share of the business, or agreeing to put the company on the market, could be the best way forward.
The three most common life changes that can force a business transition are death, disability, and divorce.
- Death. As the owner of a business, and potentially the breadwinner for a family, you should have a life insurance policy in place to address the financial risk your death poses for your loved ones. Also, your directives concerning the future ownership of the business should be clearly outlined in your will.
If you haven’t done so already, you should think through how your sudden death would impact the running of your company. Do you have all the essential information in writing? Make sure your spouse, business partner, and/or key associates have or know what they need in order to keep the business functioning.
Another consideration is estate taxes. The prospect of having significant taxes levied on your estate may mean your heirs are better off having you sell your business, and distribute some portion of the proceeds, before you die. You should talk through these issues with your estate planner—and if you don’t have an estate planning professional, you should get one.
- Disability. Having the backstop of long-term disability insurance is essential, particularly for sole proprietors of a business. You should discuss the coverage that makes sense for you with your insurance professional. In addition, if applicable, know which partner or employee would operate the company should you become disabled for an extended period.
- Divorce. Even if it’s “your” business, parting from a spouse may mean dividing up all assets—including your company. If you don’t want to sell, you’ll have to come up with the financing—or partnerships—to buy out your ex.