Entrepreneurs should create wealth with a clear exit strategy
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Recently, I read a newspaper article about a 40-year-old family restaurant that suddenly closed. It is hard to second guess that decision from afar, but the owner stated increased costs, increased taxes and higher wages for the decision to close. I feel bad when a local institution—a landmark—abruptly closes. This owner did not have an exit strategy.
Small business owners should always have a way to exit the business in place. This exit strategy should create wealth. However, most small business owners don’t even think about how they are going to leave the business. Many small businesses simply die when the owner dies. Or, like the family restaurant above, simply cease doing business.
A sound exit strategy will create wealth for the owner. If you look at high-tech firms, the owner starts the business on the premise that a larger firm will buy them out, or they plan on going public, which is another way to sell-off your business and create wealth. You too can create wealth by divesting your business.
If you plan on selling your small business, be prepared for some thorough investigation from prospective buyers. You will have to have your professionally prepared books in order for the previous five years. You will have to understand the value of your business, and how the prospective buyer is valuing your business. You can contact the MSU Product Center or Michigan State University Extension to learn how to value your business. Selling your business should create wealth for you, and should provide value to your buyer. There are other ways to create value when exiting your business.
Some small business owners will simply transfer the business to their children. A direct transfer, upon the death or retirement of the owner, will destroy value for the small business. The tax laws and tax implications will destroy the value on a direct transfer. You can, for example, gift the business to your children over many years’ time. You will want to seek professional counseling from a competent CPA to create wealth in this manner. And you may have to reorganize your small business into an LLC or an S-Corp. Saving taxes when transferring your business is another method of creating wealth when exiting your business.
There are many ways to exit your business and create wealth. You should investigate the multitude of methods and decide today how you’re going to exit your business. Having a strong, sound exit strategy will create wealth for you and reduce future liabilities. So plan ahead and create wealth.
Paul J. Werner is an MSU Extension educator from L’Anse, Michigan. You can obtain free business counseling by registering with the MSU Product Center. Werner has many years of experience in small business ownership and entrepreneurship; he and his wife currently own two small businesses in the Upper Peninsula of Michigan.
