Create A Small-business Exit Strategy

NEW YORK (MarketWatch) -- Small-business owners: Have you thought about what will happen to it when you're ready to retire? If you think that you have years to plan your exit strategy, you better check the calendar.

John Brown, president and founder of Business Enterprise Institute, a company that helps business owners successfully exit their companies, says that you need to start planning five to seven years before you plan to quit.

Brown says there are five steps business owners must take to formulate their exit plan:

Determine your objective.
"One is timing -- how much longer do you want to work in your business before you sell it, give it away or transfer it to your employees? Two is figuring out how much money you'll need for your financial security."

Designate a coordinator.
"You need to put an advisory team in place that can help you with the transition. The team could be made up of your lawyer, your CPA, your financial adviser. But you really need to have at least one adviser who knows the planning process, who can bring in other advisers as needed, and who can coordinate everything," says Brown.

Get your business appraised.
Work with a professional business appraiser, or, if your business is very small, a CPA. "Owners usually do not have an idea of what their business is worth," says Brown.

Focus on increasing cash flow.
"Most business owners will focus on increasing revenues or opening additional offices, but cash flow is used to determine the value of a business," says Brown. "If the owner can increase the cash flow by a couple hundred thousand dollars, he can increase the business value by $750,000 to $1 million."

Put a management team in place.
After you've determined who is going to take over your business when you retire, you should have a management team -- or, in a small company, just one person -- to transition the business to the new owner. "This is critical. Third-party buyers will want someone to carry on the business. The management team should have a relationship with vendors, customers, etc."

Whatever you do, don't put off the planning. "You can't do this effectively in a few days or months. The more time you give yourself to implement a plan and figure out value, the better off you'll be."

By Marshall Loeb