Why you must have an exit strategy for your business (part 1) – Financial Planning Expert

At some stage you will exit your business. It’s inevitable.

It will either be an intended exit, such as selling the business or passing it on to the next generation, or an unintended exit resulting from death, disability or illness.

Regardless, you need to have systems and strategies in place to ensure your exit is seamless and equitable for both you and your business. Fail to do this and you will not maximise your financial position upon exit. Or worse, you might walk away with nothing. Or worse still, your exit could actually end up costing you money.

In our experience, there are two common mistakes made by business owners when planning their exit:
1) Not planning for their intended exit in advance, and
2) Not planning for their unintended exit at all.

In most cases, business owners expect they will sell their business or pass it on to the next generation.

In the case of a sale, they usually expect the business will attract a price that will enable them to retire with an income to support their planned retirement lifestyle. This is a perfectly acceptable concept, however, to successfully achieve this, planning for the sale must begin well in advance.

For instance, consider the following:
• What do you think your business is worth today? Are you being realistic?
• What will your business be worth at the time of sale? Have you considered inflation?
• What do you need your business to be worth at the time of sale? Is there a gap?
• Will the business be worth as much once you leave? How will this affect the sale price?
• Will I need to pay tax after the sale? How much? Will I still be able to retire?
• Are there many buyers for my kind of business? Could it take a while to sell?
• How do economic conditions affect my business? Are there better times to sell than others?

The bottom line is the net sale price, so the planning process is very much about identifying what you need to do now to achieve the price you need later.
After considering their needs, most business owners find they need to make changes to their businesses to achieve the price they want. If they keep going at the same rate, in many cases the business will not be worth what they need it to be worth.

The necessary changes could relate to staff, management, marketing, pricing, sales, products, administration, systems, procedures and so on. All these things can have an effect on the value of your business, but we recommend you engage an expert to help you identify and implement the appropriate changes for your business.

Similarly, where passing the business to another generation, planning must also begin well in advance. Considerations include:
• Will the ownership transfer trigger a tax liability? Who will pay this, you or the business?
• Will you remain a director of the business? Will you be paid directors fees? How much?
• How will you support yourself during retirement? Do you have superannuation or other investments to fall back on?
• What are the estate planning implications for you and the next generation? Are business assets protected in the event of bankruptcy or litigation?
• How will relationships with customers and suppliers be affected once you’ve gone?
• Is the next generation capable of running your business?

Assuming you are looking to retire afterwards, the planning focus in this case is often centered around what needs to be done now so you can achieve your desired retirement lifestyle later.

Next week we will look at the implications of an unintended exit from your business.



This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial and tax advice prior to acting on this information.Opinions constitute our judgement at the time of issue and are subject to change. Financial Planning Expert Pty Ltd does not give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.
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    Financial Planning Expert is an independent financial planning business based in Melbourne. We provide genuinely independent and conflict free financial advice. We’re experts in self-managed superannuation fund (SMSFs) advice and strategy, retirement planning, property and share investment advice, life and income protection insurance, tax planning, asset protection, estate planning and advice for Australian expatriates.