When you’re exiting a business, you need to have a plan for the exit. Exiting a business is no different than running a business: you need to have a plan for getting out of the business. In a best case scenario you will establish this plan before you need to exit the business. It will be part of your documents that you set up at the time that you form your business. If you’re not as proactive, you can still implement this plan before you go through the exit process and it will make the process go much smoother.
What are we looking for when somebody’s exiting a business? What key elements need to be there?
#1 There needs to be a valuation. You need some way to value the business and it needs to be something that’s agreed upon. It could be a third-party valuation or it could be something agreed among the owners, but there needs to be some way to get to a value that everybody has accepted. It’s best that this agreement on valuation happens early in the process. Once a disagreement has happened or an exit is about to happen we’ll often see that the value perceived by the owners is different. There needs to be some way to get to a number that is binding on everybody, whether it’s a third party, an agreed to number, or some type of formula.
#2 You need a transition plan. You need some way to work some of the owners out, get the new owners in, and change the ownership structure. How is this going to happen mechanically, and how is this going to happen with customers, vendors, lenders, and other third parties that are involved?
#3 You’re still in it together. Until the exit happens, the business partners are still in the business together. They are still participating in the value of the business, and you need to figure out how that’s going to look. When do you communicate with employees? When do you update the business documents? When do you start notifying people about the change? You need to have a comprehensive plan to make sure that the value of the business is protected.
What’s been your experience with exiting businesses? Have you had comprehensive plans in the past? What would you do differently? Join us in the comments below.
This posting is intended to be a tool to familiarize readers with some of the issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity. Each case is unique. Past results do not guarantee future outcomes. Freeimages.com/photographer Thad Zajdowicz.
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