Self-assessment Step 6: What is Your Exit Strategy?
authors Nancy Chillag | January 4, 2012
This is the final article in a series that examines your business operations to determine whether your business is healthy and you are doing everything you can to maximize profit, run efficiently and minimize risk. The first article, which appeared in the October 2010 issue, page 18, examined the legal structure of your business. The second article, which appeared in January 2011, page 20, reviewed business agreements. The April 2011 article, page 20, dealt with the physical location of your business. In June 2011, page 18, insurance coverage was discussed. October 2011, page 14, examined financial systems. This month, I review your exit strategy.
The general rule is you should not start something unless you know how it is going to end. Most contractors starting their own business just think about working and making money. They start out doing the physical work on a project and, then, when they get too busy, they hire laborers. As the jobs keep coming in, they eventually hire a secretary. Although this process provides income, it is not a plan. It is a reaction.
When do you want to retire and how do you plan to do that? Let’s imagine you are retiring in 10 years. What would it take financially for you to live the life you would like at retirement? $50,000 per year? $100,000 or $200,000 per year? Now ask yourself, what amount of money will it take to generate that income?
It is likely your business will be the source of most of your retirement funds. Let’s explore the options for getting money out of your business:
1. You’re Saving Money from Business Profits. Your business may generate enough revenue for you to make significant contributions to a retirement account. If this is your plan, you need to know how much to put away each year to meet your 10-year retirement goal. Setting up qualified retirement plans in your company can provide tax benefits in addition to retirement funds. There are many restrictions on such plans, so meet with a qualified Employee Retirement Income Security Act attorney or plan provider first. Most plans require you to offer equal benefits to your employees, and the cost of doing so may outweigh the benefit.
2. You Plan to Sell Your Business. If you plan to sell your business to generate money for retirement, you need to know how the business will be valued when sale time comes. What must the business look like in year 10 to fetch the price you need? Talk to a business broker now to get that picture. When you know what you are aiming for, set up a 10-year plan to get there. A business financial planner can be a big help.
3. You Will Bring In Co-owners to Run the Business. If you are planning to bring in co-owners to run the business, you assume they will be willing to continue paying you an ongoing salary. Unless there is a compelling reason for them to do this, such as the business is a franchise and your co-owners can’t set up their own, most likely they will eventually quit to open their own businesses. This will leave you without an income at a time when you are not in a position to go back to work.
4. You Sell the Business to Your Employees. If you have key employees who could take over the management and operations of your business, you might want to explore an Employee Stock Ownership Plan, or ESOP. This plan is not right for all businesses. Usually employees are employees because they can’t run a business. Talk to your accountant and attorney before signing up for an ESOP.
All options are viable, but you need to know in your first year of business what you plan to do in year 10, 20 and so on. If you don’t know where you are going, you can’t possibly know how to get there. Put your long-term business plan in writing and review it with your trusted advisers regularly.
If you have all your business systems in order (see self-assessment steps 1 through 5) and you have your exit plan in place, it should be smooth sailing to retirement.