Business lifecycle stages: Transition
A full business valuation will help you maximize the proceeds from a sale.
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Welcome to this segment of the business lifecycle video series. Hi, I'm Jeff Sloan of StartupNation.com. In the next few minutes, you'll get financial strategies, tips from fellow business owners, and resources that can help during the transition stage of the business lifecycle.
Sooner or later, something changes in your relationship with your business, and it's time to start thinking about your end game. You may want to sell the company, pass it on, cash out just a part of your equity, or wind it down entirely. Whichever you choose, it's important to start planning earlier than you might think – at least a few years in advance. This helps avoid the pitfalls of an unplanned transition and gives you time to make sure both the business's finances and your own end up in the best possible condition.
Key considerations for this stage of your business will include saving for retirement, setting up your transition plan, and preparing a business evaluation. It's never too early to start thinking about retirement. Talk to your banker to discuss which type of retirement plan may be best for you and your business. See what this business owner has to say about the importance of starting early.
I'm a strong believer in really saving for a rainy day, and also, you have to have a game plan. It's something that I'm working closely with my accountants and my bankers. But I believe that the business that I'm doing I can actually do an earlier retirement. Things are going really good, so I'm very happy about that.
Retirement planning, as a small business owner, obviously it's important to save for retirement. Personally, as a small business owner, all my equity is tied up or the bulk of my equity is tied up into the business. I'm investing in myself. I'm investing in our people. I believe in what we're doing. So that's the bulk of my retirement planning, as well as some additional standard traditional investment vehicles.
If you expect the business to continue without you, your exit strategy can take two basic forms: selling the business outright or handing it off to a successor – typically a family member or manager whom you groom for the job. One key factor in your choice will be the degree of involvement you want to maintain in the company. Many business owners choose to remain involved to some degree, even after retirement. Here's how one business owner considers the decision.
My exit strategy I believe that, you know, my transition plan is to have a buyer acquire my company.
The transition and succession in our business cycle – you know, first I have to say that I'm a proud second-generation. My mother, Betty Garmon, is my business partner and the founder of Garmon & Co. So I'm a proud second-generation. We are working clearly and together on that first aspect of succession. I have three children and perhaps there will be a third generation, but for right now we're focusing on clarity of the first step of succession. So being a family business, we're proud of that and we're working clearly through that as we grow.
Whichever path you choose, a full business evaluation will help you maximize proceeds from a sale, or help ensure sustainability and growth after you leave. Prepare for a professional business valuation by gathering three to five years of accurate and up-to-date financial records, current profit and loss statement, a list of your business assets, legal documents such as partnership agreements or articles of incorporation, and any other documents, such as copies of major contracts that may help a professional evaluate the worth of your business.
Now let's look at some common questions about the transition stage. When should I start planning for retirement? It's never too early to start thinking about retirement. You can establish a retirement plan at any time. Talk to your banker to discuss which type of plan may be best for you and your business. If you're a sole proprietor, you can still set up a SEP, a simple IRA, or a solo 401(k) plan, any of which offers higher contribution limits than an individual IRA, and can help you reduce your taxes.
I've decided to sell my business. Now what? Decide what kind of buyer you'll sell it to. This could be an inside buyer such as a shareholder, partner, or manager. A potential outside buyer might be the owner of a related business, or even a major customer or vendor.
Once you've identified your target buyer, prepare your financials, resolve any legal issues, and take steps to make your business as attractive as possible. Solid finances, up-to-date operations, and a plan to keep management running smoothly after you're gone can all help maximize the value of your business.
Thank you for joining us for this segment of the business lifecycle video series. To find out more about other stages in the business lifecycle, click on the relevant video chapters. We'll conclude with a recap of the key considerations for the transition stage of the business lifecycle, and provide you with some additional resources.