Business owners often become so involved in their company's daily operations that they sometimes fail to realize the business might be sold. A sale of a business might be forced, for example, by the illness of the owner, by a divorce or by concern over lack of succession. It might also be unexpected as a result of an advantageous offer.
Whatever the reason for selling, an owner of a business will want to obtain the best possible price. As a business owner, then, it makes sense to establish what is known as a departure plan so that your business will attract top dollar should it be sold.
Potential growth
A departure plan isn't something that can be put together at the last moment. It must become part of the business's day-to-day management. Too often, business owners fail to do this. But unless you actually plan for the eventual sale, your business might not achieve its potential growth level nor realize its potential return.
As a business owner, the first step in preparing a departure plan is to have your business valued by a professional business valuator to determine a realistic asking price in order to make the business an attractive buy. The valuation should be reviewed and updated at regular intervals.
But you shouldn't stop there. A business that keeps good accounting records and books and maintains strict internal financial controls will be more attractive to a potential buyer than one which does not. So is a business in good operating condition and efficiently staffed.
Net-worth estimate
It's essential to have a good business plan that outlines your firm's organizational structure, clearly establishes its direction, defines marketing strategies and analyzes financial requirements. The potential buyer will have a higher regard for the business and for its management team if your business plan is progressive, aggressive and forward-minded.
The status of your business will be further enhanced if the business plan also considers such outside influences as the social climate, political developments and, in this age of reform, exposure to taxation.
The departure plan must include a realistic estimate of the business' net worth. To achieve this, you must consider the proportion of assets that are liquid and represent cash or cash- equivalent assets within the business. If your business has made substantial investments in fixed assets, you might consider taking steps to increase its liquidity and allow you as the owner to at least partially cash out. This way, you can avoid having a significant personal investment tied up in assets that cannot provide readily available funds.
A potential buyer will want to examine your firm's financial statements, earning projections and other corporate date as well as talk to your banker and accountant. So your advisers should be kept fully informed of a pending sale.
When valuing a business, the earnings of an owner/managed business are frequently understated. Unless that is corrected in advance, it will be difficult to convince a prospective buyer that the business actually does better than its financial statements show.
The balance sheets of many owner/managed businesses may also reflect advances or loans to shareholders and directors which should be repaid before the business is put up for sale. The financial statements, in other words, should be cleaned up and presented as if the business were publicly and not privately owned. That is the only way a convincing assessment of its real worth can be made.
The departure plan should specify the role that you'll play after you sell. Will you want to continue to be active in the firm, with much the same managerial responsibilities, or will you prefer to play a passive role, such as a consultant? Or will you want to be completely disassociated from the business?
Sell a division
Should you require liquidity, you might consider selling a share of the business, taking on a partner in the process, or perhaps selling one of the business's divisions for which you no longer have any use.
If you are thinking about selling your business so you can retire, you might encourage a management buy-out - normally achieved through a leveraged buy-out - or implement an employee stock- ownership plan. Taking such steps would likely preserve the continuity of the business in the hands of those employees who have contributed to its success.
You can also merge the business with another, or consider a joint venture. The terms of a merger or joint venture must be clearly defined, and you should seek legal advice when establishing lines of authority, responsibilities and functions.
When selling a business, don't overlook the income-tax aspects. Taxes can cut deeply into the proceeds from the sale unless you have had proper tax-planning advice. This is an essential part of the departure plan.
Small-business owners qualify for a lifetime capital-gains exemption of $400,000 (excluding the $100,000 exemption available to individual investors). But if certain assets such as cash or term deposits are deemed passive assets, the business might not fully qualify. Tax rules and regulations are changing rapidly and you should keep in touch with your tax accountant.
Ensures success
Departure plans should be established with the start-up or purchase of a business, or very soon afterwards. If left to the last minute, it may be too difficult to properly "package" the divestiture. A departure plan is like insurance: you never know when it will be needed. Conventional business plans may point the way to success, but a departure plan is a way of ensuring that success is achieved.
