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Phase-Out Strategies (Part 1 of 2)

Lloyd Manning |

Many plant owners are starting to plan for retirement, or at least winding down on responsibilities. Because this brings up a host of challenges, it’s never too soon to start the process.
Some owners choose to continue as always, and then, on a given day, sell out all at once. For others, it makes more sense to phase out gradually. Whatever choice you make, the day will come when it’s necessary for you to make your exit. To ensure a well-coordinated departure, it’s necessary to develop an exit strategy, and the sooner you start, the better.
Resolving the many personal and business issues involved can be perplexing, and the decision is made more onerous if you’re uncertain about your objectives. You’ll need to consider when you wish to step out, your personal health and whether you’ll be able to carry on until then, family issues, financial concerns, retirement needs, and whether you want to remain where you are or relocate.
Some of these issues should be addressed even if you’re not considering retirement, as you never know when your circumstances will change.MAKING THE TRANSITION
Phasing out of full-time management and gradually decreasing your workload is one of the more popular preretirement methods. You make a bit-by-bit transfer of your drycleaning business to a purchaser over a pre-determined number of years — never less than two and seldom more than eight. This lets you ease out of the business over a structured time period until you get the last purchase-price dollar. It also gives the person buying your operation the opportunity to phase into a thriving drycleaning business on equitable terms.
The initial considerations include:

  • Creating a strategic exit plan.
  • Identifying your most important objectives.
  • Deciding what percentage of the business is to be sold initially, and over what timeframe the remainder should be divested.
  • Formulating a critical path and timetable, deciding what comes first, second, third, etc.
  • Establishing the market value of your drycleaning plant.
  • Determining your retirement needs.
  • Clarifying what you expect from the purchaser during the transfer, including individual responsibilities and general business operation.
  • Documenting the best way to accomplish your goals and proceeding from that perspective.
  • Addressing legal and tax problems.

If you’re selling to an outsider — someone other than an employee, partner or family member — give yourself one to two years to affect the transfer. Before offering your business for sale, make sure you have a clear understanding of all your options. Make your plan flexible in case you change your mind about the timing, or if circumstances arise over which you have little control.
Always have your plan examined by legal and accounting experts. There’s no point in going through the process only to find that your nestegg is frittered away on back taxes, or that you have unworkable or unenforceable covenants in your agreement. You also need to have the business valued by a qualified business appraiser to find out if your drycleaning plant is worth less or more than what you had thought. (Click here for Howard Scott's recent article on business valuation.)ALL-CASH SALES
A common failing among owners is thinking that others will see their business as the same jewel they see it as, and that it will be immediately snapped up. Unfortunately, that’s not always the case, and particularly in a weak economy. When selling, you must contend with buyer uncertainty and hesitation.
Due to the number of businesses offered for sale, the shortage of qualified buyers, and the difficulty of arranging financing through banks and debt lenders, making an all-cash sale is rare. Accordingly, the surest, and often the only, procedure is some form of seller financing, such as a buy-in or earnout. This will involve a more protracted exit, but that’s what you’re looking for anyway.THE BUY-IN/BUY-OUT
The term “buy-in” refers to the purchaser and “buy-out” refers to the seller, but both mean that you will be paid out over the next few years. You remain active and in control until the debt owed you is retired. The buyer becomes a working minority partner or shareholder in the corporation, increasing ownership in steps until the debt is fully paid.
This is different from an earnout, where the selling price is adjustable. In this instance, it’s agreed to and settled at the time the buy/sell contract becomes effective.
One of the financing methods is to deduct from the buyer — now a partner — from his or her wages and percentage of net profit. This is applied to the purchase price until your share is retired.
You must ensure that a sufficient amount can be withheld so that you can be paid out within the allotted timeframe. It’s important that the payments to you and the debt service to any others who may have loaned the buyer money, can be made from his or her income while still leaving enough to make a decent living. Otherwise, the buyer will default — guaranteed.
If the business is a corporation, an alternative is to transfer all shares to the buyer for an agreed price and take a lien on them for the unpaid balance, which will require a fixed payment and interest rate. By remaining in the business, you become an employee of the purchaser with a phasing-out employment or management contract.Come back next week when we discuss another type of transition — the earnout.
 

About the author

Lloyd Manning

Freelance Writer

Lloyd R. Manning is a semi-retired commercial real estate and business appraiser who resides in Lloydminster, Alberta, Canada. He has written six business books; his latest, Winning with Commercial Real Estate - the Ins and Outs of Making Money in Investment Properties, is available online from Booklocker Inc., Barnes & Noble and Amazon.

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