What will happen to your business when you retire? Do you plan to sell it? Hand it down to your kids? Or will you simply have a sale and close up shop?
Your business can have a life beyond you, the sole proprietor, but it takes planning. And this planning will not only benefit you 20 years down the line, it will also help you create stability, make decisions, and even expand your business in the present.
According to Katrina Scotto di Carlo of Supportland, when you start your business, you should be thinking with the "acquisition mindset" of a start-up, which prepares from day one to be acquired by keeping operations in order while constantly identifying a "value to the market or community." On the contrary, many small business don't often plan for what will happen when the owner, often the heart, soul and curator of the business, departs.
Many boutique owners may wonder how their business could continue without the principal tastemakers in house, but is there no value in the name or brand you've created, the relationships and supply chains you've established, the people you employ, the products you sell, or the services you provide?
Scotto di Carlo maintains "most business owners in Portland close shop not so much by choice but because they find themselves in a situation which forces that choice. Thing is, there's plenty of choices. It's just that several of the more attractive ones need thoughtful planning sometimes years in advance," like preparing your business for sale.
It's All About Planning
"Most business owners will spend approximately 80 hours on average building their business plan," says Michael P. Roy of Business Exit Timing. "And this is when they really don't have anything [like assets]. They spend an average of less than six hours figuring out ultimately how they're going to liberate themselves from their business."
Roy finds these actions incomprehensible as he believes that leaving a business is "probably the most significant, complex and important financial decision a business owner will make."
"If the biggest cause of failure is lack of planning," Roy says, "then why don't you spend and invest more time in planning how ultimately you want to leave your business?"
The goal of exit planners is to help small business owners design and implement "a written, formal exit plan—something that severs as a roadmap, that can empower and guide you through the exiting process"—whether you plan to sell to a third party (which Roy says only 20 percent of businesses actually succeed in doing), pass down to employees or family, or even close. No matter what you intend to do, Roy emphasizes contingency planning, which will help you exit your business or prepare for the unexpected.
Contingency Plans
Planning how to exit your business may also be an opportunity to organize and grow your business. If you don't have documentation of how your business functions, how would you ever go on vacation without closing your doors for a week? Or, more seriously, what would happen if you were injured or hospitalized?
"If you don't show up for work tomorrow, who knows what your passwords are, who's got the key to the front door, and who knows how to do the payroll? If you're predeceased or permanently injured, who's going to step in and take that business over?" Roy asks.
It's important to document these things for the present as well as the future to ensure the security and future of not only your business but also your family and employees.
“A business with clear processes and procedures—that is not dependent on one or two individuals’ knowledge or experience—is a much more attractive prospect to a knowledgeable buyer, and will bring a higher price,” Douglas Cooper, the Assistant Director of Mercy Corps NW, emphasizes.
Planning Facilitates Decision-Making
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Your business may change with technology or trends, so there’s plenty more to plan for than just what to do if something happens you, the owner.
“I prefer to have a few different back up plans,” says Kent Lewis, the president of Anvil Media, Inc., who has had experience exiting several of his own business ventures.
He stresses having a personal exit strategy from the beginning, discussing the importance of planning for succession, which in his case has included handpicking an employee from within his company to take on more leadership over the years, or structuring buy, sell or exit agreements among partners to facilitate smooth the transition of a company.
While your core values, mission and purpose shouldn’t change over time, they do provide direction. "If you write down goals, you will achieve them. If you don't write them down they simply will not happen," Lewis says.
Your mission and goals will provide a plan where "It's actually very easy to make business decisions based on a very simple, clear vision," Lewis adds. Decisions guided by your written plan or goals will be responsibly focused on aspects that contribute to a sustainable, sellable business.
Lewis’ personal plan and goals enable him to make decisions quicker and with more certainty. "It just makes my life easier because I've gone through all these exercises in planning," he says.
Begin With The End In Mind
As business owner, you need to consider your end: when and how you want to retire. Will you continue to play a role in the business you built, or will you simply sell it? Regardless, your business is likely your largest asset, so start early.
Get a good financial planner and "Begin to start doing some qualified retirement planning,” Roy says. “Begin to start diversifying some of your net worth."
Do The Basics Right
“This may be obvious, but from our experience with small business owners, it’s worth repeating: It’s hard to sell an unprofitable business. Being profitable, with solid bookkeeping systems, good financial records, and current taxes, is the best foundation,” Cooper adds.
In sum, you can plan all you want but make sure you’ve got something worth selling before you wrap your future up in a business that might leave you bankrupt.
The insight above is just the tip of the iceberg as each of these areas (and more) require considerable thought and professional advice, especially retirement and financial planning, but you can continue the conversation next week at Supportland’s second Craft of Business meeting on Wednesday, March 14 from 6:30-9:30 p.m. Bring your questions and be ready to discuss your experience. Contact Rachel (at) Supportland (dot) com to RSVP or request a seat (if you're not a Supportland member).
Or, start talking now by leaving your questions or comments below.
Thanks for taking the time to discuss this, I feel strongly about it and love learning more on this topic. If possible, as you gain expertise, would you mind updating your blog with more information? It is extremely helpful for me.