Exit Planning For Business Owners
Business Owners Need A Plan! It has been my experience, and that of numerous other professionals, that most small Business Owners have not done a good job of Exit Planning. Most owners do not know what their business is worth; they do not have a plan for maximizing their business value at the time of transition; and they have not fully planned how to minimize the tax bite and keep more of the proceeds from this significant liquidity event. We all are going to transition our business somedayone way or other. Why not plan that exit on your terms and on your timetable. I encourage Business Owners to take some time out of their very busy day to day activities, to work On the business, instead of In the business.
What is Exit Planning? It is a process resulting in the development of a road map for successfully exiting a privately held business. It examines and addresses the personal, business, financial, legal, and tax questions involved in transitioning a business. The primary objective is to maximize the value of the business at the time of exit. It also maximizes the after tax proceeds a business owner will realize and ensures that the business owner is able to accomplish his personal and financial goals after the transaction.
Who is on the Exit Planning Team? The Business Owner needs to assemble a team of advisors to assist him or her in the planning effort. These advisors can be brought in to the situation at the appropriate stage of the transition process: a Financial Planner; Estate Planner; a Business Broker or Investment Banker; a CPA; tax specialist; a transaction attorney; an insurance professional; estate planning attorney; strategic/operational business consultants; and other specialist/personal advisors can be useful as the need dictates. Some advisors can play multiple roles and the involvement of these specialists can be cost effectively managed as required. The Lead Advisor or Exit Plan Coordinator should be a Business Intermediary skilled in exit planning.
What Do You Do First? You need to document your personal financial and non-financial needs and goals. Personal in this context includes considering the goals of your spouse and other appropriate family members as well. Work with your Financial Planner who will provide you with an analysis of your current financial resources as compared with your long term financial needs and expectations. Coincident with your financial review, you can initiate a business valuation with your Business Intermediary. He will complete a thorough business assessment and provide you a detailed report outlining the current market value, the key value drivers for your business, and the most probable selling price range based on your selection of exit alternative. These two key Advisors can get the ball rolling.
Pick Your Exit Option. Pick an exit option that best balances your personal goals and objectives. Understand that your choice of exit alternative determines the ultimate transaction value. These alternatives could include: sell to a third party strategic buyer; find a strategic partner for you to buy; find a strategic partner and merge; set up and sell to an employee ESOP; sell over time to a key employee or family member; grow with internal resources for X years before exiting; grow aggressively for X years with new partner investment capital, etc. Insure you understand the expected proceeds and the anticipated after tax consequences of whatever direction is chosen.
Affirm Or Modify Your Strategic Business Model. After you have completed and fully understand your Business Valuation, you need to do a fundamental check to be sure your business model is on target and the right choice. Complete a strategic analysis of the market environment and your business situation. Affirm or modify your strategic business model accordingly. In todays world, many businesses may need to reinvent themselves.
Think About Value Enhancement. No matter what exit option you choose, there are things to do that will enhance the transaction value of the business at the time of exit. You should commit your focus to managing these operational metrics and strategic issues. Prepare a Value Enhancement Plan. This is kind of like a business plan, but the focus is on increasing the value of the business at the planned time of exit. Get help from your Business Intermediary or others as required ensuring value enhancement. Effective implementation of this aspect of the plan can make a big difference in the financial results.
Do I Need a Risk Management Plan? Yes. At some point in the planning process, you should have an insurance professional review your objectives and make recommendations as appropriate concerning, for example, risk of loss, income replacement, beneficiary designations, etc. Proceeds from life insurance policies can sometimes be used in funding the purchase of the business or to pay estate taxes.
Prepare Other Planning Documents. There are a number of documents and information that will be prepared by the appropriate advisors with your guidance. These could include buy/sell agreements, employment agreements, employee retention plans, various trusts, wills, revisions to real estate leases, asset ownership structure, etc. Appropriate advisors will be brought in to the process as required to prepare these documents.
What Does It Cost To Complete A Plan? Each business situation and the degree of complexity of the solutions are very different. Typically, larger more complex companies will incur more cost in the planning process and in structuring solutions. Experience shows that the fees paid to the advisor team are substantially offset by improvement in the realized after tax proceeds. Small planning efforts can make huge differences in the end result!
What Is Your Key Responsibility As The Owner? It will take some of your personal time and intellectual commitment to provide input and direction to your team. Spend whatever time is required to commit to completing a plan. The professionals will, however, carry the principal burden and enable you to continue to take the time to focus on and run your business throughout the process.
About The Author: Gary Gunderson is a Certified Business Intermediary and President of Empire Business Advisors-Southeast. He is also a member of the International Business Brokers Association; a member of M&A Source; and is also on the Board of Directors and past President of the Carolinas Virginia Business Brokers Association. He has been a fortune 100 corporate executive; a mid-market CEO; and a small business owner. He has a MS Degree from Stanford University.