Ready to Retire? Your Five-Year Business Exit Strategy

An older business owner stands with his hands on his hips, his coffee shop in the background.

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Baby Boomers own about half of the private businesses in the U.S., and unless AI figures out a way for us to live forever, now is probably the time to figure out your succession plan.

Your sale may come a bit sooner than five years — no normal person plans things this far in advance. That said, this timeline is ideal for a business owner who is selling to retire.

Five years out: Set a vision

This is really a 20,000-foot view of how you want to transition your business. Start with internal vs external sales.

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Internal successions include strategies like employee stock ownership plan s (ESOPs ), management buyouts and intergenerational transfers.

Outside sales can come in the form of strategic or financial buyers and IPOs.

The Kiplinger Building Wealth program handpicks financial advisers and business owners from around the world to share retirement, estate planning and tax strategies to preserve and grow your wealth. These experts, who never pay for inclusion on the site, include professional wealth managers, fiduciary financial planners, CPAs and lawyers. Most of them have certifications including CFP®, ChFC®, IAR, AIF®, CDFA® and more, and their stellar records can be checked through the SEC or FINRA.

Internal sales tend to primarily be driven by altruism. You want to pave a path for the next generation. You want the business to stay in the family. You do not want the biggest check possible.

External sales are often a function of necessity. That makes them sound like a bad thing. Perhaps the business has grown so big that an internal succession is not financially feasible. Maybe to continue to evolve, the business needs an influx of capital. Maybe your partners need liquidity to be able to reach their goals.

In terms of your own financial situation, I'd point you back to my column on the "wealth gap," The Most Important Number for a Business Owner Considering a Sale. Your financial plan will largely dictate which exit strategy makes the most sense.

That's where the concept of a "wealth gap" comes in — the difference between what you have and what you need from a sale to retire comfortably.

If your business must fill a big gap, an external sale may be necessary. If you're already close, you may have more flexibility to pursue an internal succession.

We rely on financial planning software to find that gap. You can access a free version of what we use online.

Three years out: Make sure the books are squeaky clean

Buyers will typically examine at least three years of financials in due diligence or before. Gaps between what you promised and what your books show are one of the most common reasons deals fall apart in due diligence.

Business owners tend to be visionaries much more than they are hyper-focused on the books. The fact that your books may be a mess is not a reflection of anything malicious — it's just the way you're wired.

It's time to bring in someone to clean things up and to keep them clean all the way through to the finish line.

Two years out: Build your team

Refer to my article The Six Pros You Need to Sell Your Business. You may not engage a business broker or investment bank two years out. You don't need an estate attorney to help you protect your newfound wealth before it is found.

However, financial planners can be a good starting point because, if they have helped people like you, they will likely have relationships with all the folks you need to talk to.

Looking for expert tips to grow and preserve your wealth? Sign up for Building Wealth, our free, twice-weekly newsletter.

One year out: Engage a business broker/M&A adviser/investment bank

Selling a business is not like listing a house, where you take a few pictures and it goes on the MLS. (Apologies if that's offensive to my Realtor friends out there.)

Your business needs to be packaged as a product. There will be pitch decks, maybe video and definitely a story that will be sold to prospective buyers.

There is then (hopefully) a bidding process, letters of intent and, finally, negotiation. You'll need the right firm to take care of that.

Reality check

This whole thing will be stressful. It should be. You are selling your life's work, and it's often worth the stress if it means finding the right buyer and ensuring your financial independence.

If you're planning to sell in five years and retire in five years, don't shoot the messenger here, but it's very unlikely that you'll hand over the keys and go home the same day you get a check.

There will be a transition plan and possibly an earnout period, depending on the type of business and the structure of the deal.

Service businesses have longer transition plans. In the wealth management space, they can span three to five years. The point? Let this article be the wind at your back to get started.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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After graduating from the University of Delaware and Georgetown University, I pursued a career in financial planning. At age 26, I earned my CERTIFIED FINANCIAL PLANNER™ certification. I also hold the IRS Enrolled Agent license, which allows for a unique approach to planning that can be beneficial to retirees and those selling their businesses, who are eager to minimize lifetime taxes and maximize income.