Three essential exit questions every business owner should ask

Three essential exit questions every business owner should ask

You’ve worked hard to build your business and may look forward to the day when you get to retire. Many business owners use the sale of their businesses to help fund their retirement years. But with so much on the line, have you considered how you will successfully exit what you have worked hard to build?

There are three questions you need to ask yourself.

1. Do you have an exit strategy?

It may seem obvious, but there are a number of ways to exit a business such as having fellow owners purchase your share, keeping it in the family, or securing a new buyer.

After defining your objectives, getting a valuation of your business can help you understand the maximum potential value of your business. This information can help you prepare your exit strategy.

It’s not just selling your business for retirement. A good exit strategy should take into account a number of scenarios including death, disability or your intent to sell the business. 

For example, in the event a disability prevents you from working, having the right strategy can mean the difference between a successful transition and a forced sale.

2. Is it in writing?

If your exit strategy isn’t in writing, you may have a potential problem. Handshakes or verbal agreements are generally hard to enforce in a court of law.

It’s important your exit strategy agreement and related documents are signed by all parties involved. It’s also a wise move even if you never plan to retire. If you die, there’s no guesswork for your family about your exact intentions for your business.

3. How is it funded?

After your exit strategy is in writing, you need to secure how you will be compensated for your share of the business.

For example, if your exit strategy is to sell your business at retirement, or in the event of your death or disability, consider how the buyout would be funded and whether your agreement contains a mechanism for valuing your business interest on an ongoing basis.

One ideal funding source for a buy-sell agreement that is triggered by death of an owner is life insurance, because it is often the most affordable when compared to alternatives such as a sinking fund, a bank loan, or an installment sale.

Start the conversation

A great place to start is working with a financial professional to help you get definitive answers to these three questions about exiting your business.

If your family is a part of your exit strategy, be sure to include them to ensure your plan will be successfully received and implemented.

Also consult with your tax and legal advisors prior to implementing any exit buy-sell plan or any other method of passing the business.

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