For many business owners, the company isn't just a source of income. It's also one of their most significant financial assets and may play an important role in funding their future.
The Exit Planning Institute has estimated that roughly 80% to 90% of a business owner's net worth may be tied to the business. That level of concentration makes planning for its eventual transition an important part of an owner's broader financial strategy.
But exit planning doesn't have to mean you're ready to sell.
In fact, some of the most valuable exit-planning work can happen years before a transaction is even being considered.
Exit Planning Is More Than an Event
It's easy to think of an exit as a single transaction: find a buyer, negotiate a price and sell the company.
A better way to think about exit planning is as an ongoing process that considers three distinct questions:
- Is the business ready?
- Are your personal finances ready?
- Are you personally ready?
Those three areas can develop at very different speeds. Understanding where each stands can help an owner identify what needs attention well before a transition occurs.
1. Business Readiness: Is the Company Prepared for a Transition?
Start by looking at the business itself.
Could it continue operating successfully without you?
Consider questions such as:
- Is there a leadership team capable of running the company?
- Are important processes documented?
- Are revenue sources reasonably diversified?
- Are financial records organized and understandable?
- Are important customer and vendor relationships tied to the company rather than solely to you?
- Does the business depend heavily on your daily involvement?
These aren't only questions for an owner preparing to sell.
A company with strong systems, capable leadership and less dependence on its founder may also give the owner greater flexibility long before an exit occurs.
2. Personal Financial Readiness: Can You Afford to Leave?
A successful business doesn't automatically mean its owner is financially prepared to exit.
One of the most important questions is:
How much do you actually need from the business to support the life you want afterward?
That requires looking beyond an estimated sale price.
Your personal financial plan may need to account for:
- Assets you've accumulated outside the business
- Retirement accounts and other investments
- Future spending needs
- Taxes and transaction expenses
- Outstanding business or personal debt
- The timing and structure of potential sale proceeds
- The income your assets may need to provide after the business stops providing a paycheck
The goal is to understand how your personal financial future connects to the value you ultimately receive from the company.
That may also reveal something important: the number you hope to sell the business for and the amount you actually need aren't necessarily the same number.
We'll explore that more deeply later in this series.
3. Personal Readiness: Are You Prepared to Leave?
This may be the easiest piece to postpone.
For years or even decades, your business may have helped define your routine, responsibilities, relationships and sense of purpose.
What happens when that's no longer part of everyday life?
Before an exit, it can be worth considering:
- What would you like the next chapter to look like?
- Do you want to stop working entirely?
- Would you rather consult, mentor or serve on boards?
- Do you want to start or invest in another business?
- Are travel, family or philanthropy important?
- Does your spouse or family have the same expectations for life after the business?
These aren't simply lifestyle questions. Your answers can influence your financial needs, timeline and even what kind of exit may be appropriate.
Why Start Before You're Ready to Sell?
Many elements that can strengthen a business aren't quick fixes.
Developing leadership, documenting processes, reducing owner dependence and strengthening financial reporting all take time. Personal financial planning can take time too, particularly if you're still building assets outside the company.
Beginning early gives you something valuable: options.
And that's one of the reasons we believe exit planning can be useful even for an owner who has no immediate plans to sell.
The objective isn't necessarily to make your exit happen sooner.
It's to help ensure you're better prepared when the time comes, whether that transition happens on the timeline you expect or circumstances change along the way.
How a Financial Advisor Can Help
Exit planning sits at the intersection of the business and the owner's personal financial life.
At Seapoint Wealth Advisors, we help business owners evaluate the personal financial side of that equation. That includes understanding what they may need from a future sale, building assets outside the business and coordinating with CPAs, attorneys and other professionals as different parts of an exit strategy come together.
You don't have to know when you're leaving to start planning for it.
Sometimes the better question isn't "When should I sell?"
It's "If the opportunity came tomorrow, would I be ready?"
Next in the Business Owner Exit Planning Series:What Happens to Your Business If Something Happens to You? The Five D's.
This article is for general informational purposes only and is not intended to constitute personalized financial, tax or legal advice. Consult appropriate financial, tax and legal professionals regarding your individual circumstances.
Frequently Asked Questions
When should I start planning to sell my business?
You don't need to wait until you're actively considering a sale. Starting earlier provides more time to evaluate the business, strengthen your personal financial position and determine what you want life after the business to look like.
What does it mean for a business to be "exit ready"?
Exit readiness generally means considering both the business and the owner. That can include the company's leadership, financials, systems and dependence on the owner, along with the owner's personal finances and goals for life following a transition.
How do I know if I'm financially ready to sell my business?
Start by understanding what you'll need the proceeds to accomplish. Your existing investments, retirement assets, expected spending, taxes, transaction costs and other financial resources can all affect what you need from an eventual sale.
Do I need to know when I want to sell before developing an exit plan?
No. Exit planning can help owners identify risks, strengthen the business and improve their personal financial preparedness even when a sale isn't imminent.
Why is personal readiness important when selling a business?
Leaving a business can affect more than your finances. It can also change your daily routine, professional identity, relationships and sense of purpose. Considering what you want to do after the business can be an important part of preparing for the transition.