View this article online: https://www.insurancejournal.com/magazines/mag-features/2017/01/09/438164.htm
Every business owner will exit his or her business at some point. The key is — will it be on the owner’s terms or someone else’s?
The best time to start thinking about exiting the business is when the owner starts it. The next best time is now. Business exit planning is about defining how and when one exits their business, while maximizing value, minimizing taxes and risk and still preserving wealth.
A recent survey by Kent State indicated that 75 percent of baby boomers plan to transition out of their business over the next 10 years and 48 percent want to do the same within the next five years.
However, exiting business owners face some serious problems. Too often, the bulk of their wealth is trapped in the business and they are discovering that it will not be easy to convert those years of sweat equity and time into cash for retirement.
These agency owners become frustrated because they spent too much time chained to a business that is dependent on them. Ultimately, some of them are unable to enjoy the retirement they dreamed of and expected.
One must keep in mind that a privately held business is probably the largest, most complex, most time-consuming, riskiest and perhaps least liquid investment a business owner will have. However, it is also the one investment that they have the most control over.
It is important for agency owners to be proactive in developing an exit plan. The benefits of an exit plan allow agency owners to find a compatible buyer, sell at a higher price, pay less in taxes, effectively transfer relationships, and create a platform for a better life post transaction.
Over the years, we have seen many of the same issues come up as agency owners try to sell their business. However, sellers can have a smoother experience if they are aware of the common pitfalls that occur when selling their agency. Planning ahead allows agency owners to achieve their business and personal goals, as well as the potential to create a legacy, while avoiding these common pitfalls.
One major problem we see for business owners who decide to sell is a misconception of the value of their business. The biggest problem with valuation is when sellers have too high an expectation of the value of the agency. Yes, there are some agencies that sell to publicly traded brokers and private equity firms at top dollar. However, that is not all transactions, especially for internal sales or those with local/peer buyers. Understanding the value of one’s business is key to creating personal financial goals.
Most people expect too high of a price for their business, which means that their personal financial goals will not be met. In these cases, the owners end up working years past when they wanted to retire and then sell their business.
In today’s business world, there is a baby boomer tidal wave happening with business owners exiting their business.
Another issue is when the buyer sells the agency to what they think is the best deal because it is for the most money. Independent agents like to remain… well, independent. Agency owners that sell to large firms often run into a “corporate wall,” which rubs them the wrong way. Weekly accountability conference calls or meetings to justify income and expenses seem foreign to those that have run their own business for years. Often, corporate direction conflicts with the vision of the seller.
Understanding the philosophy of the buyer is very important to a successful transition of the business.
We have found that those going solo lack preparation and will often have major issues or regrets after selling their business. It is important for agency owners to bring in a good team of experts to guide them through the process. It’s critical to have outsiders with a dispassionate view of the situation to help with the decision-making.
For example, most people do not keep current with the tax code. A good CPA can help develop a tax strategy that will minimize the taxes paid when selling a business. A good attorney will make sure terms of the deal follow the current law. A good merger and acquisition consultant will pull all the pieces together so that the seller’s business and personal expectations are met and the right buyer is selected.
Transitioning out of one’s business requires planning. But most business owners rarely take the time to learn the steps to tackle this on their own. Visit our website www.agencyperpetuation.com to find out about our webinar on the “10 Fatal Errors in Business Exit Strategies.” There are also other resources to help you learn more about preparing to sell your business. We have also created a program that will guide agency owners to create their own business exit strategy.
Selling a business internally or externally can have great rewards if the sale is done correctly. However, there are also a lot of pitfalls that can ruin the process. For agency owners to have the best experience perpetuating internally or selling their business and to achieve their ultimate personal and business goals, it is important to plan ahead and be aware of common mistakes that can plague the process.
The decision to internally or externally sell a business is complex and has many moving pieces. For most, the fact is that the seller is not just selling a business; they are selling everything they have created. They are selling a part of themselves. Share this article with a colleague.