If you’re a small business owner nearing retirement, it’s important to start thinking about how to avoid common small business exit strategy mistakes.
As a business owner, you are no stranger to hard work. Throughout your career, you have held many different roles, coordinated many projects and ultimately built a career to be proud of.
Owning a small business can be challenging, and as you progress in your career, you may start asking yourself, “How long can I last?”
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The reality is that many entrepreneurs are great at their craft, but don’t always have the same skills when it comes to finances.
Over the years, perhaps preparing an exit strategy for your small business has given way to improving your skills and profits. But as retirement approaches, it’s important to have an exit strategy so your business can continue operating long after you’re gone.
If developing a retirement and exit strategy seems overwhelming or complicated to you… let yourself relax. Remember that most of your life is spent building your own business, not being a financial guru. Let’s take a look at some of the most common mistakes small business owners make when planning an exit strategy and how to fix them.
Mistake #1: Starting to plan too late
Planning your exit strategy starts long before you retire. From day one, there are many steps you can take to grow your business to a place where you can walk away with peace of mind and maximize the value of your company (i.e. enterprise value).
- Invest in culture. Make sure every hire shares your values and work ethic during the interview process. You can show your appreciation for great employees with generous training, compensation, and benefits. Knowing that there are good people to take care of things when you leave will make it easier to leave, both logically and emotionally. A healthy culture and employee base are also attractive to potential buyers!
- Optimize the process. The operational aspects of your business need to be well organized and easy to explain to newcomers. Just because your systems make sense to you doesn’t mean they will make sense to the new owner. Simplify your operations and make the value of your business transparent to potential buyers. Retiring your business shouldn’t take years because you’re finally forced to sort through paperwork that you’ve neglected for the past two decades.
- Build income. Are you generating enough income each month to save for retirement with your profits? Build your income stream by expanding your product/service or increasing the markets in which you do business. You need more than just income to pay the bills. Buyers also want to see that you have diversified income streams rather than one that is dependent on a single customer or market.
The better you can grow revenue, optimize processes, and build culture from the start, the easier it will be to exit the business when the time comes. You don’t have to “clean up” yourself and it’s easy for buyers to see the amazing value you’ve created!
Mistake #2: Running Your Company Without a Successor
If you think that selling your company is the only way to get out of business and retire, you are wrong. There is more than one option for figuring out how to continue your business after you decide to leave.
One option might be that day-to-day functions are now overseen and handled by someone else, such as a trusted business partner or family member.
It’s not uncommon for small business owners to use family members as part of their exit strategy. In many ways, this can be a fantastic way to create a family legacy.
It can even simplify your transition if you’re concerned about how you’ll adjust to retirement. By handing over the business to a family member, you reduce your workload over time as your family member takes over the business and the business becomes more self-sufficient.
If this is part of your plan, you should make that clear before you anticipate retirement. Training and coordinating with your successor often takes longer than you expect. Also, unforeseen challenges may arise that you will need time to resolve.
You shouldn’t expect this strategy to work overnight.
Mistake #3: Making Yourself Irreplaceable
It’s easy to do, and sometimes even a little rewarding. But the more irreplaceable you are, the harder it will be for you to retire.
While it’s great to specialize and have the expertise to make you the go-to person when running a business, it’s sure to put your company in a bind once you’re gone.
By building a business model that centers around yourself, you may delay your exit. It is not your goal to let the company go out of business immediately after retirement, so make sure you empower as many people as possible to take your place.
what does this look like Here are three examples:
- More mentors, less bosses. Allow your employees to work their way through certain issues and resist the urge to step in and deal with them, even when you know you can do them faster and more accurately.
- Memorial Policy. Start creating documents that reference your policies and procedures. This can be as simple as creating some worksheets or checklists that your workers can use. Or it could be a complete SOP explaining every detail of running a business.
- delegates. If you’ve thought about the day you retire, you know that there will come a day when your current employees will have to take on the workload. Start delegating more appropriate tasks so your team can gain experience and receive guidance before you leave.
If your retirement is getting closer and you’re starting to plan an exit strategy, remember that fungibility isn’t a weakness. This usually means you’ve built a strong team.
For small business owners, that’s the point.
Retirement decisions require you to consider many factors. It’s not uncommon to be nervous or worried, and you may wonder if you’re ready.
The good news is you’re not the first to feel this way, other small business owners have had the same difficulty when thinking about an exit strategy. Be sure to plan ahead so you can feel more comfortable as retirement approaches!
The content in this material is for general information only and is not intended to provide specific advice or advice to any individual.
This article was written and expressed the opinion of our staff of consultants, not the Kiplinger editorial staff.You can check advisor records with the SEC (opens in a new tab) or with FINRA (opens in a new tab).