“After all is said and done, a hell of a lot more is said than done.” Olmstead’s Law (Jester’s Condescending Dictionary)
At some point in time every business owner will “exit” their business. In most cases, a small business represents a significant part of family wealth and the owner will be keenly interested in maximizing this value when the business is either sold to an outside 3rd party or key employee, or transferred through an orderly succession to a family member. Unfortunately, most entrepreneurs are so immersed in the daily demands imposed in operating their company that they have neglected to properly plan for the inevitable transition of their business. The goal of this article is to briefly review the exit/succession planning process and highlight the importance that these plans have for every business owner. Whether the goal is to exit the business in six months or ten years, it is critical that a business owner recognize that succession planning is the single most important way to take control of the terms and conditions of exiting their business. Proper exit planning will cut the variability of the business control transfer, and can secure a sound financial future for their family.
What is Exit Planning?
Exit Planning, also commonly called “business succession planning,” is a method that addresses three critical questions a business owner will face at some point:
- What is the timetable the owner seeks to exit the business?
- Who will succeed the owner when the business is transitioned or sold?
- How much income is needed from the business transition/sale for retirement?
The Exit Plan becomes a written roadmap that is developed in conjunction with legal, accounting, and financial professionals and is designed to maximize the value an owner receives when exiting the business. Exit planning can be a fairly complex long-term process and take many years to properly carry out. The process can be broken down into simple action items and deliverables and should illustrate how value can be received at a very early stage. A professional team will bring efficiency to the process by implementing a basic structure of steps to be followed, and can make sure that the experience will be a personally gratifying and financially rewarding endeavor for the owner.
The key steps involved in developing an Exit Plan include:
- Establishing Exit Objectives: Determining the retirement timetable, long-term income needs, and financial requirements necessary to reach them.
- Identify the key drivers of business value: What is the fair market value of the business if it were sold today?
- Plan to build & keep business value and reduce risks: Activities that can be implemented to leverage best practices and maximize the business value.
- Transfer of ownership, management, & control: Determine the anticipated buyer (outside 3rd party, key employee, family member) and develop the structure for ownership transfer that maximizes financial security while minimizing taxes.
- Contingency Planning: Protect the continuity of business operations should an unexpected event occur.
- Wealth management/preservation: Secure financial independence by developing a financial plan to manage the income from the business sale.
- Successful Exit
While nearly all business owners will recognize the importance of having a formalized exit and succession strategy for their future and the future of their company, very few actually have a plan in place. What most business owners fail to recognize is that the process is fairly easy to start and can be done at a minimal cost. While many components of the Exit Planning process will need the ability of a CPA, Attorney, and Wealth Manager, significant value and efficiency could be achieved by implementing this process through a competent Business Intermediary/Brokerage firm. An experienced business intermediary firm will be able to streamline the exit planning process significantly by taking the lead in the planning framework and tapping the necessary resources (accounting, law, wealth management) over time as they are required. This team concept is very cost-effective for the business owner as he is only paying for the specific services at the time of use. A business owner is now able to put a toe in the water and set up the framework for the exit plan at very little cost. By establishing the current market value of the business with a determination of the owner’s exit timetable and the income needed for retirement, the Business Intermediary will have the essential elements for the foundation of the Exit Plan.
Implementation should be viewed as a process versus a one-time event, and the most successful and rewarding Exit Plans are those that are started years in advance of the business transition. Whether the planned exit is six months or ten years from now, an owner should be proactive. The longer that a business owner has to carry out the Exit Plan, the greater the opportunities will be to maximize the business value, reduce tax liabilities, avoid key employee turnover, and end emotionally charged family issues.