Exit planning is a form of operational strategic planning. It utilizes owners, and often leadership, to establish the end goal for a company and the best method to achieve that goal. Exit planning includes analyzing financial, legal, and tax implications for the company while bearing in mind the ultimate goals: maximizing the company’s value at the time of exit; meeting the owner’s personal goals; and minimizing the tax burdens.
Preparation is the key to successful exit planning. Preparation includes preparing the owner, the management team, and the company in tandem with proper preparation. A good exit plan requires finding the right team to properly support the owner throughout the process to provide the owner enough support to stay on course.
Most importantly, a proper exit plan considers the business owner’s exit in accordance with the owner’s expectations. Many plans take into consideration how to minimalize taxes. Exit plans protect the business owner’s interests, whether the owner decides to sell to an outside buyer, management, employees, or the next generation in a family business. The ultimate goal is to ensure the business owner and the company are financially and emotionally ready when the transition occurs.
Exit Planning Versus Business Succession Planning
Many people confuse exit planning and business succession planning; the difference is the focus of the plan’s protection. An exit plan is focused on the business owner and issues directly relevant and critical to the business owner. The business succession plan is focused on the business itself, not necessarily any effect the sale will have on the owner individually. Similarly, an exit plan takes into consideration all of the factors affecting a business owner’s departure from the company. On the contrary, the business succession plan is merely focused on preparing the business itself for the owner’s departure.
Key Steps of Exit Planning
Setting the Exit Objectives
The reasons for setting up an exit planning strategy are as diverse as the colors in the rainbow. Some business owners choose to leave a current business to start a new business. Others plan for natural, social, and financial disasters which may affect the business at a later date. Advance planning will also allow a business owner to leverage tax reduction opportunities and carefully plan the timing of an exit to allow for maximum post-exit cash flow.
Establishing the Value of the Business
Know which valuation approaches may be utilized based on your industry. Potential approaches include: (1) market approach compares one business to other businesses in the same industry that recently sold; (2) income approach converts anticipated cash flow into present full market value by reviewing income generated by the business and applying a multiple based on a comparison to other companies in a peer group; and (3) asset-based approach determines the market value of the tangible assets minus the liabilities.
Knowing the correct valuation model is only the first step. Prior to a buyer conducting due diligence, seller should already know the answers having already conducted the due diligence. From the buyer’s perspective, the main purpose behind due diligence is (1) verifying the information the seller has provided, and (2) uncovering any material information that the seller has not provided either intentionally or unintentionally. If the seller is unprepared, it is a tool of torture.
Meet with your team of advisors and executives and prepare the relevant documents and information, review the documents to avoid any levels of surprise, and avoid someone looking over your shoulder as you gather the information. The list of documents a buy will request is predictable and is generally divided into categories such as legal, financial and operational. Organize your responses prior to listing your business for sale. Confirm all corporate records are current and up to date. Conduct a contract review and ensure a sale will not trigger any adverse effects on commercial contracts. Memorialize and protect any material relationships your business maintains with third-party vendors. Prepare a complete list of real and intellectual property rights, employee benefits, government permitting issues, environmental issues, and outstanding legal claims.
Identifying and Evaluating the Exit Planning Strategy Options
Begin the process by weighing the pros and cons of each of the strategies to determine the best option for your business. Although a plethora of options exists, for small and medium-sized businesses, several strategies often prove the best options.
Shutting Down the Business is fast and easy; but this option does not provide any revenue for the sale of the business. Draining or Liquidating the Business allows the owner to sell the company for the value of the assets. It is simple, clean, and eliminates the transition issues. However, the liquidation option can lead to higher taxes and potentially breaching contract agreements. Selling the Business can generate significant cash flow for the business owner, but requires finding a suitable buyer, can often take longer than expected, and the price is highly dependent on the market. Family or Generational Transitions provide for family continuity, but relationships can often cloud the parties’ judgment during negotiations, family relationships can be torn, and the new owner may not be suited to running the business. Lastly, Management or Friendly Buy-Out of the Business allows the business owner to sell the business to team members that are interested and capable of running the business. The Friendly Buy-Out allows for continuity and an owner is left with the feeling his or her business is in the hand of a friend. However, like with a Family Transition, the relationships can cloud the parties’ judgment during negotiations and the new owners may need to arrange for a larger loan to fund the purchase causing for longer delays.
Prepare Plans for the Exit and Life After the Sale
Determine the value of your company based on the exit planning strategy selected for the transfer. Utilize your experts and remember flexibility is required if the unexpected happened. Remember the company’s valuation must consider the value of the business itself. On average, 80% of individual business owner’s net worth is tied to their company. The business owner must ensure the owner’s personal finances are sufficient to provide at the appropriate level after the sale. And, finally, the business owner must consider what will happen after the sale. With many business owner’s, the business is family, it is their child. Leaving the day-to-day operations of the business can be more difficult than the owner imagined. Planning for after the sale is a key component to ensuring the business owner is satisfied with the sale of the business.
Don’t be afraid to ask, “what’s next?”
Protect Your Business and Values
Beyond the monetary value of the company is the business’s continuity. Incentivize management and key personnel to remain in place after the transition to ensure the business remains an operating concern. Determine the post-acquisition time period and the length of the pay-out in analyzing the amount of dollars necessary to sustain your current lifestyle.
Plan Your Personal Wealth and Estate
Your team of legal advisors, financial advisors, and accountants will ensure your exit plan strategy includes a diligent financial plan to invest and manage the proceeds of the sale of your business.
Remember, selling a company is the natural step forward in the business model. The key is planning! Molly Neck