Exit Planning: A Modern Business Strategy

Exit planning is a modern-day business strategy and the most effective process for learning to work on your business while you work in your business — even if you’re not quite ready to leave. A review of the market and exit planning stakeholders shows that:

• The exit planning market is approximately 10 trillion dollars.
• 7.2 million business owners 50 years and older own more than 9 million businesses.
• 4.2 million businesses are successful.
• The typical exit planning candidate has been in business for 10 years, has one or more key employees and does in excess of one million dollars plus, in profit annually.
• Many cases exist for the smaller enterprise where profits are approximately a half-million dollars annually.

Why Is Exit Planning Critical?

A majority of closely-held businesses will change hands within the next five years. The balance of those businesses are ready to change hands now. Forty percent of all businesses deal with ownership transfers each year. Most business owners have not taken active steps to transfer out of their business, and for most owners, the business itself is their single largest asset.

Illustrative Scenarios

Years ago I met with Bill and Paul McGrath, owners of a thriving construction company. What I assumed would be a business planning meeting turned into a “We’re- getting-out-of-business-how-do-we-do-it?” meeting. As successful as they were, they were tired of changing tax codes, government regulation and the day-to-day grind. A sale to a third party was not an option because they were not willing to stay on after the sale — and they had failed to develop a management team, which any savvy adviser would require as a condition of purchase. Neither had children and transferring ownership to employees was out of the question. Bill and Paul’s thriving business was worth no more than the value of their tangible assets. After the sale of those assets, dozens of employees lost their jobs, the business disappeared, and Bill and Paul left millions on the table.

Franklin Taft was understandably a bit neurotic. He was increasingly anxious to begin planning for his eventual departure from his sales rep business, but his concerns prevented him from proceeding. “I’m too busy working in my business to think about how to leave. Besides, I don’t know what to do and neither do my advisers. Worse yet is that I know what happens if my competitors find out or my principals learn about it.”

Exit Planning Team

No one person has all the skills or knowledge needed or required to create a comprehensive exit plan. You already have a team of advisers that are trusted. Your exit planning adviser works with selected members of that team and creates the blueprint, recommendations and action list to a successful exit. Your exit planning team includes:

• Exit planner.
• CPA.
• Attorney.
• Financial planner.
• Business broker.
• Insurance agent.
• Wealth manager.

Some of your advisers serve more than one role and can fill multiple roles. You may not need every discipline to support your exit plan.

Knowing Your Company’s Worth

The critical elements of an exit plan and the single most important element of them all are:

• Owners must pick at least a tentative departure date so advisers can put all planning efforts in context.
• The preliminary financial needs analysis.
• You must assess your post-retirement financial needs, because meeting them is a key measure of your exit planning success.
• Choosing a successor is similar to the first element in that your choice is not immutable, but does give structure to the exit plan.
• Keep in mind, it is not uncommon for an owner’s sale to key employees to be pre-empted by an offer from a third party.
• An estimate of future cash flow, since “cash is king”!!!
• Know what your company is worth. This is the single most important element of all. To accomplish this, you should consider hiring a certified value specialist to provide your advisers an idea of what your company is worth. Some CPA firms provide this service as well.

Planning for Your Business Exit

Inevitably, everyone will exit their business, now or some time in the future, willingly or through sickness or death. Owners begin to learn about exiting their business when three streams converge:

1. The first is when you realize you want to do something different each day besides going to work.
2. The second is when you become aware that you are either approaching financial independence, or making significant strides toward reaching that goal, or you can reach it by exiting your business.
3. The third stream is when you learn of a possible health problem or other family issue.

That, in a nutshell, is the purpose of exit planning — to leave your business on your terms and on your schedule, and just as important, be prepared in the event of an untimely death, sickness or accident.

How to Leave the Business

How many exit paths really exist for business owners? I’ve heard as many as 50, but we can only really come up with eight ways for owners to leave their business:

• Transfer the company to a family member.
• Sell the business to one or more key employees.
• Sell to key employees using an ESOP.
• Sell the business to one or more co-owners.
• Sell to an outside third party.
• Engage in an Initial Public Offering.
• Retain ownership but become a passive owner.
• Liquidate.

Choosing a Path

First, you and your adviser team need to identify your most important objectives; second, consider the most important element — value — along with the internal and external considerations that impact your decision and third, evaluate the tax consequences. Learn what value drivers buyers are most interested in and will pay the greatest amount for. Have you ever wondered why one business has buyers lined up willing to pay top dollar, while another sits on the market for months, even years? The items common to all industries combined with items specific to your business that drive up value are called — “value drivers.” They include:

• A stable, motivated management team.
• Operating systems that improve sustainability of cash flow.
• A solid, diversified customer base.
• Facility appearance consistent with asking price.
• A realistic growth strategy.
• Effective financial controls.
• Good and improving cash flow.

The reason a buyer is willing to pay a premium price centers on his or her perceptions of risk and return. If the characteristics of what buyers find valuable — characteristics that both reduce risk and improve returns are present — a buyer will be willing to pay top dollar.