How Contractors Can Avoid Common Exit Planning Mistakes

There comes a time for every contractor to leave the business and move on to a new stage in your life. Maybe you’re planning to retire, make a career change, or start a family. Regardless of why you’re leaving the field, you want to make sure that you leave your business in good hands. 

A clear exit planning strategy facilitates a smooth transition between you and your successor. If you don’t put enough time or energy into your exit plan, you’ll leave your remaining team members in a lurch. A lack of exit planning can also damage existing client relationships and compromise your organization’s financial future. 

To avoid these negative consequences, you’ll need to work with experts to create a thorough exit strategy. 

Ways to avoid common exit planning mistakes 

Start Now

When you’re busy handling the day-to-day of your contracting business, your exit strategy can feel like a ‘later’ problem. 

However, contractors typically wait too long to start planning their transition and scramble to get things figured out at the last minute.

Approximately 48% of business owners have no exit strategy at all. 

This often results in a vague, undefined exit plan that leaves your company directionless after you leave. This makes it difficult for your successors to keep the business running and maintain cash flow. 

If you don’t start planning early enough, you may also be forced to postpone your exit strategy longer than you would like. It’s never too early to start thinking about your next steps – and planning now will help you avoid stress when the time comes to make a transition. 

Find an Experienced Advisor

Exit planning is a complex process, especially for contractors with thriving businesses. Fortunately, you don’t need to handle it on your own. Partnering with a certified exit business planning solutions advisor (CEPA) and consultant is the best way to set both you and your company up for financial success. 

A qualified CEPA will help you handle the financial and logistical challenges that come with exiting your business. They’ll take a holistic look at your company and develop a personalized strategy to maximize its financial potential during the transition. 

When choosing a CEPA, make sure they have completed training from the Exit Planning Institute, which offers MBA-style training. 

Additionally, you’ll want to make sure that your exit planning advisor has experience working with contractors and understands the unique challenges of your industry. 

Learn What Your Business is Worth

Before you move on from your business, you’ll need to determine exactly how much it is worth. There are a variety of factors that affect the overall value of your company. These include your current income and customer base, your company’s assets, and your future growth potential. 

It’s not enough to estimate your business’s value – you’ll need a precise valuation to bring into sale negotiations. 

The best way to get an accurate figure is to have your business professionally evaluated. This will give you a strong idea of how to negotiate the sale and what the future will hold.

Clean Up Your Records

If you’re thinking of transferring ownership of your business anytime soon, you’ll need clear, detailed financial records in place. Go through your books and tax records to make sure everything is clear and accurate – you may consider having a professional bookkeeper or CPA do this for you.

You’ll need accurate financial records to sell your business and maintain any investors you have during the transition. Not only will this help you get a fair deal, but it will also help your successors continue your legacy without any confusion. 

Involve the Stakeholders

In addition to bringing a CEPA on board, you should also make sure that your employees, customers, and investors are appropriately involved in the transition. Your business wouldn’t exist without these people, so it’s only fair to make sure they’re properly prepared for what lies ahead.

Of course, you’ll need to keep your exit strategy private early on as you’re working through important financial and logistical decisions. However, a critical aspect of your exit strategy is deciding when it’s necessary to get others involved. 

If you leave your key stakeholders in the dark, you risk a severe backlash that could make it difficult to sell the organization. Keeping your stakeholders informed gives them time to plan for your exit and minimizes stress for everyone involved.

Conduct a Gap Analysis

While planning their exit, many contractors focus entirely on their business – and not enough on their own financial needs. You’ll have to be ultra-realistic about your future financial needs and create a plan that you feel comfortable with. 

A gap analysis looks at the difference between your current financial performance and your financial goals. This will help you identify weak points in your business so that you can plan for your financial future. 

For example, you may need to make adjustments to your business model to improve your cash flow and overall valuation to hit your personal financial goals. 

Like many aspects of exit planning, your gap analysis should be conducted sooner rather than later. This gives you the time you need to make financial changes. 

Come Up With A Backup Plan

It’s impossible to fully predict the future of your business, which is why it’s so important to have a backup plan for your exit strategy. Only 20-30% of businesses that go to market ever sell, so you need to be prepared for the worst. Even if you never have to use it, you and your stakeholders will feel more comfortable knowing you’ve considered all your options.

There are many different ways to exit your business, so explore a variety of options. For example, if you’re planning on passing your business on to a family member, look into ways to liquidate or sell the business instead. 

Plan For Tax Implications

As with every major business decision, your exit is going to come with tax implications. 

It doesn’t matter whether you’re selling your business, transferring it, or liquidating it – you need a tax strategy in place now to avoid surprises later. 

In particular, you’ll need to consider how capital gains taxes will factor into your decision, as well as how your income taxes will change.

You’ll also need to consider real estate taxes on your facilities, as well as gift taxes if you’re passing the business on to a family member. 

Need Help Planning Your Exit? 

Don’t take on the stress of exit planning alone – hire a trusted CEPA to help you through every step of the process. 

At All Contractor Marketing®, we offer mergers & acquisitions services (including exit planning) specifically for contractors. We understand the ins and outs of working in this industry, from your unique client base to compliance regulations to project timelines. 

If you’re ready to start planning your exit, don’t hesitate to reach out with questions or schedule a consultation with a certified exit business planning solutions advisor.