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Exit Planning: Preparation means advantages in managing risks

Ian MacFadden
Ian MacFadden - Contributed

Benjamin Franklin is quoted to have said, “By failing to prepare, you are preparing to fail.”

 This wisdom from the past has never been more relevant than it is today, as our pace of life continues to accelerate in an increasingly complex world, where dealing with change and uncertainty has become an essential business survival skill. In business, uncertainty represents risk, and managing that risk effectively can make the difference between success and failure.

Being prepared can help you manage risks by identifying and deploying mitigation strategies that minimize potentially negative outcomes. For example, for most of us in business today, the threat of rising interest rates is a clear risk to our profitability. Do you have a plan in place to protect your bottom line from a sudden increase in rates? And what would such a plan entail?

Another tangible example of a looming risk for most business owners is what to do when the time comes to retire. You may have had thoughts about that inevitable day in the future when you will leave the business and enter the next phase of your life. You may be considering a traditional retirement, or perhaps you have a lifelong passion that you will now have time to pursue. Whatever your unique situation, a successful transition that meets your personal and business goals will require careful preparation and planning.

Exiting your business will be complicated and time consuming as there are many factors to consider and decisions to make in order to achieve a successful outcome. It will be challenging to work through this while simultaneously dealing with the day-to-day demands of your business. It will be essential to take control of the process through careful planning that will help you manage through the turbulence.

You will need to seek out professional advisors for help on matters outside your level of expertise. Depending on your unique circumstances, you will need advice on personal financial planning, estate planning, taxation, legal issues, accounting, banking, business brokerage and others. This is necessary to ensure the transition of your business is well structured. Also, you will have many stakeholders to consider that could include family members, customers, suppliers, employees and investors.

By all accounts, Exit planning is a three- to five-year journey, or longer, depending on the circumstances. In most cases time will be required to make changes to the business that will make it more attractive to potential buyers. This could include some basic improvements such as reducing costs and disposing of obsolete inventories. It could also require enhancing the capacity of the management team to ensure the business is running on all cylinders. If the business is transitioning to family members, it may take longer than expected to ensure everyone is in agreement and fully prepared for their roles, post transition. So it’s important to start preparing for the transition as early as possible.

Business owners should be aware that shifting market conditions will impact their transition plans. A recent study by Business Development Bank of Canada (BDC) indicates 41 per cent of entrepreneurs expect to exit their business in the next five years. Over half of those will sell the business to third parties (outside the family). This sudden wave of businesses going up for sale will create a market where buyers are increasingly selective and price sensitive. What can you do to make your business stand out in a buyers’ market?

So if you’re a business owner looking to retire in the next three to five years now is the time to start preparing you and the business for the transition. A lack of careful planning will translate into unnecessary disruption to your business, missed opportunities and a failure to maximize the value of the business to potential buyers. And, after all, you do deserve to reap the rewards of your many years of hard work.

Ian MacFadden is co-founder and Partner of exirRITE Planning Services. His column appears the first Friday of each month. You can reach Ian at ian@exitrite.com or go to www.exitrite.com

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