Most entrepreneurs are so busy juggling day-to-day operations that an exit strategy feels like a distant priority. The truth is: the best time to plan your exit is when you don’t need to. BCT Wealth Advisors can move you toward that exit with confidence, even if that milestone is a decade down the road.
According to recent data shared by Principal Financial Services, 4.5 million U.S. business owners, who represent over $14 trillion in wealth, will transition out of their businesses in the next decade. When surveyed, 58% of owners lacked a formal transition plan, which may leave their legacies—and their financial futures—hanging in the balance. Luckily, smart exit planning can change that outcome.
Ask the hard questions.
Anticipating the day when you’re no longer in charge is difficult to imagine, but it is an important step in the journey of exit planning. By answering these questions honestly, you can preserve your legacy and strengthen the foundation you’ve built:
- When do you want to exit your business?
- How much do you need from the business to fund your next chapter?
- Who are your potential successors (co-owner, family, employee, third party)?
- What would happen to your business if something happened to you tomorrow?
- What steps can you take today to increase your business's value?
Know what your business is worth.
Do you know how much your business is actually worth? If the answer is no, you’re not alone. According to Principal Financial Services, approximately 49% of businesses nationwide have never had a formal valuation. Understanding the particulars of your company's performance, market position, assets, and liabilities can help you:
- Set realistic retirement goals
- Establish estate plans for loved ones
- Make sound decisions about your investments
- Determine the timing of your exit
Assembling a team of valued experts, such as your CPA, attorney, investment adviser, or wealth management advisor, can help you determine the value of what you’ve built. A comprehensive approach to business valuation will incorporate the following:
- Asset-Based Approach: This evaluates the liquidation value of your business. What would your business be worth if you sold it tomorrow?
- Income-Based Approach: This looks at your earnings potential. What will your business earn over time?
- Market-Based Approach: This compares recent sales of businesses like your own. What are businesses like yours selling for?
Decide if you’re keeping it in the family.
Many entrepreneurs set out to create a legacy business that flourishes through the generations. But sometimes, outcomes don’t match expectations. While 2/3 of small businesses are family-owned, about 1/3 successfully transition to the next generation, and even fewer transition over to the following generation. If your goal is to create a legacy business, the key questions to ask are:
- Who is appropriate for which role within your business?
- How would ownership shares be distributed?
- What would happen to family members who are not active in the business?
Answering these questions will help you and your successors evaluate strengths and goals and determine the sustainability of your plan.
Create equitable family distributions.
One of the trickiest aspects of succession planning is ensuring that family members are treated equitably, whether they are involved in the business or not. BCT Wealth can recommend strategies that distribute assets fairly without forcing the sale of the business or creating liquidity problems within your business. This might involve:
- Life insurance to provide cash for non-business heirs
- Real estate allocations
- Investment portfolios
- Structured buyout arrangements
Mind the (retirement) gap.
Realistically, most retirees need at least 80% of their pre-retirement earnings to maintain their lifestyles. Without careful planning, business owners can find themselves asset-rich and cash-poor, with wealth trapped in their businesses. Luckily, the BCT Wealth Advisors team can evaluate your income and portfolio and suggest strategies that support your goals.
Build a trusted team.
No business owner should navigate the waters of succession planning alone. The decisions you'll face touch every aspect of your professional and personal life, requiring expertise across multiple disciplines that no single individual can master. Your trusted team may be comprised of your accountant, attorney, investment manager, wealth advisor, or company CFO to help you with:
- Business succession planning
- Personal financial planning
- Estate planning
- Tax strategies
- Investment management
As a community-driven bank, BCT can connect you with experts who will tailor their guidance to your needs.
Exit gracefully.
Your business is your life's work, and the livelihoods of many depend on the steps you take. Exit planning ensures the wealth you've created serves its purpose long after you've moved on to your next chapter. Get in touch with BCT to shape a successful exit strategy today.
Contributed by: Emma Pedraza, CFP®, Client Coordinator, BCT Wealth Advisors