The Four D's of a Business Exit Strategy
"Begin with the end in mind," says Stephen Covey in his book,"The Seven Habits of Successful Living." Those who have created a successful business know it does not happen without planning, hard work, and a little luck. Yet most have no exit plan for leaving their business. The truth is that most business relationships do not have happy endings. To have a successful business, you must plan for all four D's of a business exit strategy.
The idea that your business will provide you with income after you are no longer there may not be a reality. You have to depend on yourself. Take the time to look at the four D’s of a business exit strategy: death, disability, divorce, and departing. To have a successful business, you must plan for all four D’s.
The Four D's of a Business Exit
Death: The issue of the death of a small business owner should be considered during the start-up of a business. Unfortunately, during the creation of many buy/sell agreements the issue of death is only addressed at the urging of a life insurance agent. At the meeting, you arbitrarily decide how much insurance you can afford and how much your company is worth when in fact you do not know.
Disability: Death is not as likely to end the business relationship as a disability. Small business survival will often take prescient overpaying a disabled partner. If the person is important to the business, the financial strain impacts the business and the family who depends on the income.
Divorce: You can imagine the torn feelings if a disability occurs, but what if the partners cannot get along? How do we split a partnership without financially ruining each other? It may be complicated by many personalities, some may not even be a part of the dispute, yet may be affected financially.
Departure: You may all be happy working together, but your partner or you may decide to leave for another opportunity or simply to take life easier. Who is going to do the work? What is owed the leaving partner? Where is the money coming from? All important considerations for your business exit strategy.
A Fair Buy/Sell Agreement
For the small business owner, each one of the four D’s has special demands: family, income, taxes, and transfer of control of assets. An agreement, commonly called buy/sell agreements, can be used to handle the four D's. The concern of the family or income can conflict with the business. The business exists as a separate entity. Reduce conflict by developing mutual fair agreements and the desired level of income.
Once you understand the four D’s, include the following actions in the creation of your business exit strategy:
- consider incorporating your small business to recognize yourself and your business as separate entities legally
- find a method of determining the value of the corporation that can be done at least annually and will qualify under IRS standards
- develop an employee benefit plan that will assist with the departure of each partner in case of death, disability, or retirement
- plan for who retains company ownership and who gets paid off
The great American dream is to: build a business of your own; bring it to life; make it successful. How you plan your small business exit strategy will determine your financial success. Just as building a successful business takes planning, hard work, and a little luck so does leaving it.
About the guest author: Brent Dees, CFP, CSA is President of Brent Dees Financial Planning and a registered principal with Financial Network Investment Corporation. He is one of only a handful of advisors in the nation who has both the certified financial planner and the certified senior advisor designations.