As a private business owner, your exit strategy isn’t as simple as selling off company stock when the market’s high. To secure your retirement goals, you’ll need a plan, and you’ll need time on your side. The insights that follow can help you better understand the challenges you’ll face and help you get started on your strategy sooner rather than later.
The payoff of early planning
Start planning your exit at least five years before your goal retirement date. Taking action early gives you distinct advantages, including:
- Allowing you to consider all exit options.
- Creating a clearly defined vision for your company’s future and your role in it.
- Providing time to prepare your partners, investors or employees.
- Helping you guide business decisions leading up to your exit.
- Being prepared for an unexpected offer or crisis.
- Providing time to mentally prepare for the shift from full-time work to full-time retirement, a challenge owners often struggle with the most.
Exit challenges for private business owners
The illiquid nature of private company assets impacts multiple aspects of your exit strategy, including those below.
Company value. Instead of simply tracking share prices, you’ll need a valuation specialist to provide an objective statement of your company’s worth. Work with someone who understands the various types of valuations and who can provide appropriate valuations that match each exit strategy under consideration.
Exit structure. As a private business owner, you’ll also need to decide on your preferred exit strategy, such as:
- Sell to a third party (e.g., competitor or new entrant to industry)
- Sell to company management
- Leverage a private equity infusion
- Leverage an employee stock option plan
- Gift to family
- Donate to charity
Who you sell your company to can also impact the valuation of your company. For instance, a competitor should warrant a higher sales price due to economies of scale that this buyer can achieve.
Tax implications. You can choose to conduct a cash sale — where you sell the business as a complete entity — or an asset sale, where you sell off components of the business. When considering your options, understand that it’s not just what you get (the sale price), but what you actually keep after taxes and transaction fees. The structure of the sale can provide significant variations between those two numbers. A CPA with private business experience can help you understand the potential tax outcomes for each option.
Finding a buyer. Unlike the relatively quick proposition of selling publicly held shares in the market, finding the right buyer for a private company can potentially take years. Working with a professional business broker who has experience specific to your industry can help identify (and attract) likely prospects. Unfortunately, more than three quarters of all closely held businesses that are put on the market never actually make it to a closing transaction.
Expense considerations. Business owners need to review post-sale impacts on their retirement budget. For instance, owners should examine which personal expenses are currently being run through the business and be prepared to include these expenses in their personal budget after the transaction is complete. In some cases, it would elevate the potential valuations if these expenses were shifted from the company and to the individual several years prior to the exit.
Mental preparation. Although not directly related to the illiquidity of assets, this is another notable difference between private and public company exit planning. As a private business owner, you’re most likely deeply involved in the operations of your company on a daily, full-time basis — and may have been in this position for decades. It can be a difficult transition to suddenly move from that lifestyle to one of free time and leisure — or, in the case of a private equity transition, turning into an employee overnight and taking direction from another person who now has controlling interest in the business you built. It’s a shift for which you need to mentally prepare.
Next steps
An important step in planning your exit strategy is to complete a valuation gap calculation. This is where you estimate the funds you’ll need to achieve your retirement dreams and goals, and compare that to the value of your business. If there is a gap, your plan should include strategies for potentially increasing the value of your business before selling or finding other ways to make up the funds shortfall.
Our team within Wealth Management can assist you with your business exit strategies. To schedule a personal discussion and set your plan in motion, please contact your Private Banker.
The information, views, opinions, and positions expressed by the author(s), presenter(s) and/or presented in the article are those of the author or individual who made the statement and do not necessarily reflect the policies, views, opinions, and positions of Hancock Whitney Bank. Hancock Whitney makes no representations as to the accuracy, completeness, timeliness, suitability, or validity of any information presented.
This information is general in nature and is provided for educational purposes only. Information provided and statements made should not be relied on or interpreted as accounting, financial planning, investment, legal, or tax advice. Hancock Whitney Bank encourages you to consult a professional for advice applicable to your specific situation.
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