What exit strategy do I need for my small business?

Those who have created a successful business know it does not happen without lots of planning, hard work, and a little luck. Yet ironically most business owners have no exit plan for leaving their business. The sad truth is that most business relationships do not have happy endings. To have a successful business, you must plan for a successful business exit strategy. This is especially crucial for small business owners since they often have much more limited resources to manage their business with. It is important to keep in mind that you have to depend on yourself and not the idea that your business will provide you with income after you are no longer there.This is simply not reality.There are four common reasons that necessitate having a business exit strategy and they often referred to as the "The Four D's of a Business Exit".Your business exit strategy will need to take all of these into account-

• Death-The issue of the death of a small business owner should be considered during the start-up of a business. Unfortunately, during the creation of many buy/sell agreements the issue of death is usually only addressed at the urging of a life insurance agent. At the meeting, the small business owner often arbitrarily decides how much insurance they can afford and how much their company is worth, when in fact they do not know. The reality is that concrete numbers should be decided upon and then insurance put into place.
• Disability-This is much more likely to end the business relationship than death.You should understand that small business survival will often take prescient over paying a disabled partner. If the person is vitally important to the business, the financial strain impacts the business and the family who depends on the income. This is where both disability and key person insurance can come into play.Consulting with your insurance advisor is crucial during the start-up of the business to address these issues.
• Divorce-Due to the rising divorce rate this begins to affect more small businesses everyday. While you may be able to imagine the torn feelings if a disability occurs, but what if the partners cannot get along? How will you split a partnership without financially ruining each other? Keep in mind that it may be complicated by many personalities, some may not even be a part of the dispute, yet may be affected financially. This issue should be addressed as well in a fair buy-sell agreement.
• Departure-While you may all be happy working together, but what if your partner or you may decide to leave for another opportunity or simply to take life easier. Has it been decided who is going to do the work? What will be owed the leaving partner? Where is the money going to come from? All of these are important considerations for your business exit strategy.

For the small business owner, each one of these four D's has special demands on: family, income, taxes, and transfer of control of assets. An agreement, commonly called a buy/sell agreement, can be used to handle each of these situations. You can reduce conflict by developing mutual fair agreements that also spell out the desired level of income.

You can also include the following actions in the creation of your business exit strategy:

• Consider incorporating your small business to legally recognize yourself and your business as separate entities.


• Work to find a method of determining the value of the corporation that can be done at least annually and will qualify under IRS standards.


• You must develop an employee benefit plan that will assist with the departure of each partner in case of death, disability, or retirement.


• Included in the employee benefit plan you should have a plan for who retains company ownership and who gets paid off.