When you plan, you avoid failure. It applies to all situations and scenarios. However, one area where lack of planning can hit you the hardest is succession planning for a business. Many small- and medium-sized entities (SMEs) suffer from this. When an organization fails, its impact becomes visible in other areas, such as supply chains, employment, and the country’s economy. If you believe that shutting down a business is a failure, you must understand that not all types of closures mean losses. A few enterprises use exit strategies when they don’t have a successor. A study revealed that within a decade, about 800k companies would face the challenge of business succession or management change due to Japan’s aging population.
The country has introduced gift or inheritance tax measures to promote succession plans and prevent crises. These laws will prevail from 2018 to 2027. If a company announces a stake to a successor (even if the person is not a family member), they can become eligible for tax exemptions. The case will be different if they sell the stock. Business transfers are an intricate process as these involve many parties, like regulatory bodies, legal agencies, and business valuations. Then, the difference of views between buyers and sellers can also become a hurdle. That’s why one needs to rely on a competent financial advising agency like Cedar Smith to navigate this vital process without much hassle.
Exit planning by Cedar Smith Management
When you move with this awareness, you can focus on maximizing your company’s worth to secure a good deal upon selling it. An exit plan lets you exit business on your time and conditions and utilize the total value. It helps manage your tax burden. You can save enough for emergencies like death, medical illness, divorce, burnout, etc. Plus, the business can still exist without affecting your family members’ and employees’ lives. What you leave behind is a legacy and not a failure.
A few popular exit practices
You can sell your firm to an outsider for immediate cash. The best part of this step is buying time to get the correct type of buyer and negotiate well. When you prepare your company for sale, you increase its value, which leads you to many other lucrative avenues. However, once you sell your company, you cannot control its direction. Then, your business performance has to be very solid. Another exit route is Employee Stock Ownership Plan (ESOP), where you share the company’s profit with workers. As an owner, you can enjoy ownership and liquidity. Usually, this plan offers several tax benefits. But your transaction value can get affected. It may not suit you if you have taken considerable debts for some reasons.
IPO or Initial Public Offering is the buzzword in the business circuit for the profitability factor. You can expect to gain massive ROI and capital through this. On the downside, you cannot get immediate liquidity from your shares. There will be a lock-in period. Plus, it follows a complex process that has its cost. Although there are many ways of exiting a business, the simplest option is still transferring business ownership to family members. The company can continue to run smoothly, and employees are not affected as much. Since heirs tend to be familiar with the systems and processes, it becomes easy for them to build their careers. Some people may not pursue this because of the tax consequences. You can avoid this situation by planning well if you hire a good financial advisor.
Cedar Smith Management discusses the need for an exit strategy
Planning for an exit is always better than exiting your business without any plan. You need to save for your retirement also adequately. When you know why to leave your firm, your physical and mental stress decreases because you have already taken care of your investments. Your interest rates and taxes will be transparent. You can get instant liquidity depending on your exit option. If you think about exit from a business angle, your investors want handsome returns. You can ensure this only if you sell or cash out your business. You can even invest money in a new startup to channel your energy.
One may ask when it’s best to exit a business. There is no simple answer to this, but your risk assessment and business value can show you the path. You also have to see how much your business can grow. If you think rapid revenue growth can be an indicator, you must reconsider it. Revenue will be a part of the valuation. Also, it’s just one variable. Many other factors are there. For example, you have to find a buyer. You cannot expect the buyer to be ready with an offer. Studies show that only 25% of companies exit through a sale. Hence, it’s better to know who may be interested in acquisition at the right time.
Your business should also show continuous and steady growth. It helps you explain what fuels your company. Then, operations also play a critical role. Most people prefer a company that follows standard systems and processes to run the show. It causes less or no disruption upon acquisition or transfer.
It takes work to decipher everything individually when you have many other critical things to handle. However, if you hire a financial advising agency, you can depend on them to study your business and suggest the best strategy. They can help you with taxes and revenues also. Make sure you select a reputable company for this. A competent team will be up-to-date with all the laws and regulations concerning a firm. They can also determine the accurate value for your business to ensure you get the maximum benefit.
Some business owners need help understanding the importance of exit planning. They feel one shouldn’t sell something which they created with blood and sweat. However, you cannot be emotional about your money and investments. Practical decisions help you choose a better future. You can consult your financial advisor to understand the logic if you have any doubts.