April 25, 2011 Objective: Students will identify reasons why it’s important to plan your exit strategy.

April 25, 2011

Objective: Students will identify reasons why it’s important to plan

your exit strategy.

Homework

• Assignment 9.2 is due today please turn in at this time.

Computer Lab

• Tomorrow we will be meeting in the computer lab.

• I will have a sign on the door, but try to remember go directly to the COMPUTER LAB.

Your Exit Strategy

Why is it important to plan your exit strategy?

Plan Your Exit• Do you know how you are going to exit your business? You

may have a dream of going public, selling to the highest bidder, or retiring and handing over your business legacy to your family.

• Many small business owners have no exit strategy for their businesses in the event of their disability, retirement, or death. Given the current economy, it isn't surprising small business owners focus their energies on business survival, future growth, and even remaining active in business after retirement.

• However, a business exit strategy not only means having a plan for the unexpected - including financial hardship, injury, disability and even death - it also means having a plan for the succession or transfer of ownership of your business when it comes time to hang up your hat and retire.

Things to Consider

• Develop of Succession Plan (This should be part of you Business Plan)

• Invest in a Retirement Plan and Insure your Worth– It's relatively easy to address retirement planning,

because we all hope to get there and, more importantly, want to enjoy it.

– Life and disability insurance are equally important for the small business owners, because they protect you and your family, should the worst happen.

Steps to Closing a Business

• If you are considering leaving your business below you will find suggested steps to follow in closing your business. Decide to close a business Sole proprietors can decide by themselves that they should close...

Selling Your Business• If you decide that selling your business is the right exit

strategy for you, be sure that you cover all your bases. In order to sell your business officially, you will need to prepare a sales agreement. This is the key document in buying the business assets or stock of a corporation. It is important to make sure the agreement is accurate and contains all the terms of the purchase. It would be a good idea to have an attorney review this document. It is in this agreement that you should define everything that you intend to purchase of the business, assets, customer lists, intellectual property and goodwill.

Transfer Ownership• As they say, all good things must come to an end.

Maybe you'd like to retire, or maybe it's time to pass the family business to the next generation. For one reason or another, many business owners will face a time when they need to transfer their ownership rights to another person or entity.

• Business owners have several options when it comes to transferring ownership rights. Be sure to consider all your options before making any decisions.

Transfer Ownership OptionsAn Outright Sale

By selling a business in full, you will transfer ownership immediately and receive payment for your assets right away.

A Gradual SaleA gradual sale is a flexible option in transferring a business that tends to benefit everyone. This option often benefits individuals that cannot afford an outright sale, but instead are able to finance a long-term payment plan.

A Lease AgreementBy transferring your business ownership through a lease, you'll commit to a contract that details the conditions and payments you'll receive for the temporary rights to the business.

The Family BusinessTransferring ownership of the family business to a new generation is often more complicated than it sounds. Additional tax implications, such as estate and gift taxes, generally arise for both parties. Proactive succession planning can help provide business stability, prepare for tax obligations, and make the ownership transfer as smooth as possible.

Legal Resources for Operatingand Exiting a Business

• There are many resources available to help you comply with the basic laws for conducting and exiting a business.

• A good place to locate articles with information is the SBA website at:– http://www.sba.gov/content/legal-resources-

operating-and-exiting-business

Liquidating Assets• If you have decided to get out of business and

are not able to pass your business on, merge it with another business, or sell it as a going concern, liquidating the assets could be the most appropriate exit strategy.

• However, before you terminate your lease, sell a key piece of equipment, or disconnect your utilities, make sure you have a well thought-out plan. If you determine that liquidating your assets is your best course of action, follow these 10 key steps…

Step 1… Talk to your lawyer and accountant

• Nothing can substitute for case specific advice that only your lawyer and accountant can provide.

• Also remember that you will need the cooperation of your creditors. Once you have developed a plan, present it to them and get their permission before you act. As long as you are candid and have a formidable plan, they will most likely go along with it.

Step 2… Prepare an inventory of business assets

• Scrutinize your assets: inventory, assess, and prepare each item for sale.

• Begin by preparing a current inventory of your business assets. Try to include photographs, serial numbers, and a brief description of the condition of each item. Your inventory will save you considerable time and expense as you move through the sale process and will be invaluable if you are later asked to explain the sale to your creditors or the Internal Revenue Service (IRS).

Step 3… Secure your merchandise

• If your customers or employees will be disgruntled when they learn that your business is closing, consider collecting the keys, changing the locks, or hiring a security guard. You won’t be able to recover any of your investment if the items you’ve invested in are no longer around.

Step 4… Establish the value of your assets

• Liquidation value refers to the amount you can expect to recover in a forced sale situation. Generally, this amount is at least 20 percent less than retail value.

• To establish the liquidation value of your assets, work with a qualified appraiser. Obtain a written liquidation value appraisal before you entertain any offers.

• Study the appraisal well before you make any significant decisions concerning your sale.

Step 5… Make certain the sale is worthwhile

• Once you have your liquidation value appraisal, estimate your net sale proceeds. Remember to deduct all of the costs of the sale. These include items such as commissions, advertising expenses, moving and storage costs, labor expenses, credit card discounts, rent and utilities. Also deduct amounts that are secured by liens on your assets such as rent, delinquent personal property taxes, and loans owed to secured creditors.

• If a liquidation sale doesn’t look worthwhile after you’ve done your calculations, talk to your attorney. There may be more appropriate exit strategies for you to pursue.

Step 6… Choose the best type of sale• Negotiated sales in a distress situation are desirable but uncommon. Logical buyers include your

competitors, customers, suppliers and landlord. For example, if you own a restaurant, your landlord may be interested in purchasing your equipment so that the premises can be rented to a new operator at a higher rate.

• Consignment sales are appropriate when time is not of the essence, your assets are easily movable, and there is a local dealer specializing in the type of items you want to sell. If you choose a consignment sale, you will need to turn your assets over to the dealer, who will sell them and pay you an agreed-upon amount following the sale.

• Internet sales are rapidly growing in popularity and importance. Before deciding whether to sell online, familiarize yourself with the rules and your legal obligations as a seller by reading the FTC's Internet Auction Guide.

• Sealed bid sales are appropriate when confidentiality is important. All the bids are submitted in sealed envelopes that are opened at the same predetermined time and place.

• Retail sales, also known as Going-Out-of-Business Sales, are appropriate for consumer items like small appliances, gifts and gadgets. They are also a good way to sell shoes and clothing, since people don’t like to buy these items unless they can try them on first.– To protect consumers from unscrupulous retailers who falsely claim to be going out of

business week after week and year after year, many states now regulate Going-Out-of-Business Sales. If you want to conduct such a sale, be sure to research the law in your area.

• Public auctions are appropriate for most business assets. Typically, your property is sold item by item to the highest bidder.

Step 7… Select the best time for your sale

• Begin with the season, then select the best day and time to hold your sale.The season should be appropriate for the type of merchandise you want to sell. Snow-blowing equipment, for example, will sell better in December than it will in July.

• The day of the week and time should be convenient for the customers you’re hoping to attract.

Step 8… Arrange to hold your sale at the most appropriate location

• The location of your sale can have a significant impact on your net proceeds. Choose it carefully, based on what you’re trying to sell. While construction equipment, cars, trucks, snowmobiles, and lawnmowers can be moved and sold just about anywhere, other items should be sold in place. Restaurant equipment, for example, can drop as much as 50 percent in value if moved.

• As a general rule, it is best to hold your sale on your business premises.

Step 9… Hire an expert

• The right expert can ensure that you get the highest possible dollar return. To choose the right expert, analyze your assets. Then, determine who--an auctioneer, a dealer, a broker, etc.--has expertise in each category of assets you want to sell. If you are not sure where to start, ask your banker, lawyer, and business associates for recommendations.

Step 10… Use a non-recourse bill of sale

• The professionals you’ve hired should take care of the paperwork required to transfer title to your assets.

• Nevertheless, double-check to make certain that each bill of sale states that the item was sold “As is, Where is.”

Filing for Bankruptcy

• Deciding to file for bankruptcy can be a painful decision, but you may find yourself in a position with no other options. To protect yourself and your business, educate yourself about this course of action before making the decision.

Assignment 10.1 The assignment:• Create a 300 word essay summarizing 4 important

items that a small business owner should pre-plan for in regards to exit planning long before it is time to actually exit the business.

• Tip: For METRO Dual Enrolled Students… Refer to the 2 Articles from the Women’s edition of Entrepreneur Magazine on the subject of Exit Planning located inside the module’s 10 “Additional Module Supports” folder. One in particular shows internal and external exit strategy options in an easy to understand grid format.