Many business owners don’t think about exit and succession planning until circumstances force them to. Proactively taking control of exit planning ensures the best possible outcome for you and your business. With this in mind, it’s far better to start as early as possible – even if you know you won’t be stepping down (or back slightly) for a while yet. Exit planning and succession planning gives you peace of mind, and it also helps to secure the business’ long-term future.
So what are the main exit planning options? Traditionally, successful businesses get sold, and less successful ones fade away to nothing until the owner finally calls it a day. But there is another option gaining momentum among forward-thinking business owners: passing ownership to employees (including family employees) and maintaining an ongoing interest (both financial and emotional) in the business.
Let’s weigh up the three options in turn:
1. Let your business fade away/run it into the ground
If your business can’t be sold (usually because it is too dependent on you as the owner), this may be your only choice. On the plus side, it avoids you having to make a hard decision about exiting. But, unless you’re a huge fan of the ‘bury your head in the sand’ approach, it’s not that big a plus point! And you can only really take this approach if you have enough personal wealth to live off in the years to come. If your business hasn’t generated enough money for you to live on in retirement, you may be forced to carry on past your prime.
2. Sell your business
Often this is the first instinct of small business owners who are thinking about exit planning. The plus points include a cash lump sum, immediate overnight freedom (unless you have to stay on as an employee, that is), and reduced tax rates on capitals gains for business sales. You also have the personal satisfaction of knowing you built a business up and sold it on.
There are some downsides to selling a business, though. If you do have to stay on temporarily as an employee, you may end up even less free than before and you may struggle with the transition from boss to employee. Financially, the cash lump sum may only be a small part of the total payment for the business – some or most of the value may only be paid if certain future performance criteria are met. In reality, those conditions may not be met because, sadly, it’s very common for businesses to fail after a sale – as many as 80% of businesses fail in the first few years after a sale.
Also, the emotional costs of selling your business can be pretty high. Many business owners describe the post-sale feeling as being almost like a bereavement. Sure, you may think you’ll be glad to be free, but often what business owners really want to be free from is certain aspects of running the business, not necessarily the business itself!
3. Switch to an employee ownership business model
An employee ownership model (such as ISOP), allows you to keep an ongoing interest in the business and focus on the aspects you really enjoy. It’s also a great, systematic way to hand your business over to family member employees.
Although you usually won’t receive a lump sum in this method (because the payments are more gradual), you do benefit from income over a longer period of time. And, although you may lose the tax benefits of an outright sale, clever planning on the part of your accountant can usually limit this impact.
This is also a much more positive option for the business as a whole. The original owner maintaining an active interest in the business – along with having good reporting systems and management information – helps mitigate the risk of failure after takeover. This means you’re far more likely to get paid the full value of the business, just over a longer period.
After many years of working with business owners, I have come to realise that keeping an interest in the business and having a better work/life balance (and more freedom to do what you enjoy) is the dream scenario for most business owners. For me, employee ownership is the best way to achieve that.
This post is based on an extract of my book Do More of What You Love: The New Approach to Business Succession Planning, out now.