Your company began with a plan — a strategy to start your business on the best possible footing. Similarly, you need to plan for the day when you cease to own your company. Although you may not see the need for an exit strategy right now, there are a number of unexpected events that could require you to sell your business.
What would happen if (God forbid) you died or became disabled to the point you are no longer able to meet the demands of owning a small business? Is your spouse a stakeholder in the company? If so, what would happen to the company if you were divorced? Or what would happen if your business partner suddenly decided he no longer wanted to be part of the business? These — and countless other unexpected contingencies — make a documented exit strategy a must-have for every small business.
An exit strategy minimizes the hassle and heartache of a business transition. Perhaps more importantly, an effective exit strategy protects your interest in your company. But in order to be effective, your exit strategy needs to take into account a multitude of considerations. Here are three of the most important things an effective exit strategy needs to cover:
- How much the company is worth - One of the first things you need to decide is how much your company is worth. This is not as simple as it appears. There are several different ways to assign a value to a business. Some are more appropriate than others, depending on the type of business you own and other factors. Consult your attorney and/or a professional business appraiser to decide which valuation method is best for you, and then reassess your company's worth on an annual basis.
- What each stakeholder will receive - When a partnership dissolves, one person usually keeps the company and one person is typically paid for his/her share. Unless you have decided in advance which person stays and which person is paid, the business may suffer significant and even irreparable damage due to the legal entanglements that are involved in a hostile business transition. Furthermore, the stakeholders might not be entitled to equal shares of the company. Talk with your attorney about drafting legal documents that detail the division of the company and its assets.
- The difference between personal assets and company assets - In sole proprietorships and S corporations, the line between business assets and personal assets is oftenblurred. Disentangling the assets at the end of the business' life is a hardship you don't need to endure. A much better approach is to provide for the separation of the assets long before you reach that point. One way to accomplish this is through incorporation. Through incorporation, your business is given a legal life of its own. It earns income and owns assets independently.