Business Owners Need an Exit Plan

I’ve been fortunate to have a front-row seat when it comes to watching many Southern Nevada small businesses succeed over the years.

My interactions with these business owners have allowed me to see the sacrifices they’ve made, understand how they adapted to economic change, and in some cases how they’ve expanded their business into new or unforeseen areas with great benefit.

While the majority of these businesses have backup plans to handle all the challenges companies face from time to time, there is one thing that can be overlooked: What’s the business owner’s exit plan? In other words, what happens to the business when the owner who built the company or has owned it for decades wants to retire or do something else?

It’s a question many Southern Nevada business owners should be asking: What is my succession plan? If your goal is to retire in the next five to ten years, you may want to start having these conversations now.

There are many different scenarios to consider depending on your particular business, but in general, here are some key questions that may help you start your discussion.

Do you plan to transfer or sell your business to a family member?

With some early planning and straightforward conversations, you can avoid some of the family conflicts. If you haven’t had a serious discussion with your family members about taking ownership of the business once you retire, that may be an excellent place to start. Some business owners already have an heir or heirs with a strong connection to the company, others may want to ensure ownership is split between many heirs.

If you plan to sell your business to family members, you’ll need to have a realistic idea of what the company is worth and what options family members may have to purchase the company. There are several financing options available – whether from a financial institution or through a resource such as the Small Business Administration.

How do you know when you are ready to sell?

Advisors have a couple of ways to determine this. The first question may be how do you plan to spend your time after selling the business? As the business owner, it’s essential to take an in-depth look at what you think selling the company will provide to you after taxes and fees and whether that will allow you to quit working. You’ll also need to discuss how those assets are invested. Part of that conversation will include a look at market conditions, future risk, and what your overall expected health needs will be during retirement.

How do I determine what my company is worth?

Unfortunately, there is no quick answer or simple equation that will provide an in-depth answer for everyone since every business is different. But to assist a business owner looking to transition their company in the future, there are some questions to be considered, including:

Will most of the company’s valuation be based on assets or cashflow? 
In terms of assets, what options are available to properly value them?
How should I determine the value to my company’s cash flow?

It’s important for any business owner to plan for the future. The issues and considerations outlined above should help generate discussion about this important issue and offer some insight into a properly constructed business succession strategy.

Philip Potamitis is executive vice president, commercial lending at Bank of Nevada. He has served clients in Nevada and across the country with commercial and industrial lending solutions for more than 25 years.