Have you thought about an exit strategy?

lloyd_manningLet’s accept the fact that we are all getting older. And, for many, it could be time to start planning for retirement or, at least, winding down and phasing out. This brings up a host of challenges and it is never too soon to start the process.

Some woodshop owners might choose to continue indefinitely. Who knows? They just might live forever. Others think that on a given day they will be able to sell the business for a substantial sum. Others die before turning off the lathe. There are many options.

Making preparations so a successor is in place before you gallop off into the sunset is the more expedient procedure. Whatever you do, which could include nothing, the day will come when it will be necessary for you to make your exit — prepared or not. To ensure a well-coordinated departure it is necessary to develop an exit strategy. The sooner you start, the better off you’ll be.

This transition and divestment can be perplexing and time-consuming. But there are many ways it can be accomplished. Resolving personal and business issues can be difficult at the best of times and can still be more onerous if you are uncertain about your longer term objectives. The germane issues revolve around the age at which you wish to step out, personal health in the event you will not be able to carry on until then, family considerations, financial concerns, retirement needs, procedural matters and whether you wish to remain where you are or relocate.

Even if not considering retirement, some of these issues should be addressed. You never know when circumstances will change.

Timing

You can never start planning your exit strategy too early. Many experts suggest that five years prior to retirement is the optimum time, but others think it should be sooner than this. Many otherwise astute businesspersons postpone making these plans because they can’t accept the fact that someday it will be necessary to move on. They unwisely put off important decisions until another day. It is important to get started early. Delaying the planning process could bring about unintended consequences and perhaps decrease your woodshop’s value. It is wise to develop a written exit plan, one that sets out your objectives, details your constraints and documents how you plan to achieve these goals.

The initial steps include:

Creating an exit plan that would include a divestment strategy.

Identifying your most important objectives.

Formulating the proper timetable. This is deciding what comes first, second, third, etc.

Determining your anticipated retirement needs and the best way to maximize your retirement savings.

Documenting your goals.

Determining and documenting the best way for you to attain your goals and proceeding from that perspective.

Addressing the potential legal problems and tax consequences.

If selling the business at a future date is your goal, give yourself one to two years to accomplish this goal. Before offering it on the market, ensure that you have a clear understanding of all of your options. There are several paths you could take, each depending on how you want to get out and the length of the transitioning period. Make your plan flexible in case you change your mind about the timing or if circumstances change.

Always have your draft plan examined by legal and accounting experts. There is little point in going through all of this only to find that your gains are frittered away to the IRS or you could potentially have unworkable covenants in your divestment action plan.

The buy-in, buyout

The process of phasing out of full-time management and gradually moving into a lesser position is a popular method of retirement planning and execution. One of the better methods is to arrange a buy-in, buyout. Buy-in refers to the purchaser; buyout refers to the seller. By this procedure an orderly transfer of your woodshop is made bit by bit during a certain number of years — never less than two and seldom more than 10 — to a partner, associate or an outsider. The purchase price is agreed to at the time the contract is signed.

The difference between this and an outright sale is that you remain active and in control of the business as a transitioning seller or partner until the full debt owed to you is retired. There should be a down payment of sufficient size to ensure that the buyer does not walk.

The last words

It cannot be said too often. Transitioning from active business management to a comfortable lifestyle in retirement must be planned well. It can never be a case where on an appointed day somewhere in the future you will gather up your personal possessions, put your hat on your head and, with a wad of money in your jeans, walk out the door. An exit where you depart with your health, your wealth and your reputation for running a good shop intact will take meticulous planning and methodical execution.

Start now, not someday when it becomes a do-or-die situation. Consider all your options. Select the one that works best for you and get the best legal and tax advice. 

Lloyd Manning is a semiretired commercial real estate and business appraiser and financial analyst.

This article originally appeared in the December 2012 issue.

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