What's in a good Exit Plan?

Business owners are often so busy addressing everyday challenges that they postpone the critical task of planning their inevitable business exit. That’s a problem.

First, let me describe the problems that waiting causes. Then I’ll provide an overview of a planning process - one based on your exit objectives, and flexible enough to adapt to changing economic, business and personal circumstances. This could be the difference between liquidating your company and selling/transferring it for a lot of money.

I’ll begin with a common but sad story of two (anonymized) owners who failed to plan.

This husband-and-wife team had built a multimillion-dollar company in the renewable energy sector. The day-to-day grind of running a fast-growing company, navigating the labyrinth of government regulation, constant staffing issues, financing pressures and their never having the confidence in their team to allow them to have a well-earned break from the business had taken its toll.

For them, a sale to a third party was not feasible, not only because neither was willing to remain with the company after a sale but also because they had failed to develop a strong management team. Most professional buyers are only interested in purchasing companies with great management teams who are committed to remain in post after the sale, as it’s risky not to have that continuity.

Transferring ownership to one or more key employees was also out of the question. No employee had been groomed to assume ownership responsibilities, none had expressed an interest in buying the company and indeed none had the wherewithal to do it in any case.

Transferring the company to their children was impossible because their children were uninterested in working as hard as their parents.

Their only exit option was to liquidate, because their highly profitable company had little worth beyond the value of its tangible assets. After the liquidation sale, dozens of employees lost their jobs, and the owners left millions of dollars on the table. All because they did not plan ahead.

How can you avoid the same fate?

1. Easy - Plan Ahead! The issues the owners ignored (among them, grooming a management team and not documenting their processes) proved to be their downfall. But these and most other issues - if addressed in advance of your exit - can be resolved in a manner that:

(a) is cost efficient,

(b) enables your business to be sold / transferred, and

(c) adds to the value of your business.

A successful business exit will typically take 3–10 years minimum and sometimes much, much longer for those who delay their planning.

2. Set measurable goals. Like any good business plan, your Exit Plan must set out your goals, assign accountability and continually measure results. This is especially important when your goals are to protect / grow the value of your business and minimize taxes.

3. Incorporate flexibility. Create an Exit Plan that is flexible enough to react quickly and effectively when the unexpected happens. The older you are and the harder you work makes the unexpected more likely.

4. Use a proven process. You are only likely to do this once in your lifetime, so take advice where you can, to learn from those who are doing the same thing or have done so themselves. I advocate the following steps:

Step 1: Set your exit objectives: Do you know your retirement goals and what it will take - in cash - to reach them?

Step 2: Determine the value of your business. Do you know what your business is worth today, in cash? Hint: I can provide an appraisal of value, based on empirical evidence of other businesses like yours that we have sold (the gold standard of appraised value is what a buyer will pay).

Step 3: Increase your business value: Have you identified the best ways to increase your company’s value and cash flow?

Step 4: Selling to an outsider: Do you know how to sell your business to a third party for maximum dollars and minimum taxation?

(or)

Step 5: Transferring to an insider: Do you know how to transfer your business to insiders (family members, co-owners or employees) for cash rather than give it away?

Step 6: Business continuity planning: Do you have a continuity plan to protect your business should you die or become disabled prior to your exit?

Step 7: Wealth and estate planning: Do you have a plan to assure your family’s financial security should you die or become disabled?

The thought and actions that go into answering these questions constitute your unique Exit Plan.