The Exit Planning Process: What you need to do to get Started NowSubmitted by Business Owner Succession Strategies on May 10th, 2021
I was re-visiting the Survey of Owner Readiness that our Exit Planning Institute (Twin Cities) Chapter published a couple of years back, and I was reminded that it says 99% of business owners agree that they should have a written exit plan. That is overwhelming conviction, right? On the very next page, it says that 79% have done no planning at all! How can this be? How can 99% think they should have a plan and yet so few actually do have a plan?
I think the reason is that these business owners without a written plan do not know how to get started. We help business owners to get their plans started and once they engage in the process, they appear to feel a lot better about it! So, the number one thing to do is get started. A good place to start is by working with a Certified Exit Planning Advisor (CEPA). A CEPA advisor has gone through a comprehensive training and study program, passed an exam and is required to maintain the designation with ongoing Continuing Education credits.
The process that most CEPAs follow with business owners is to start with an Assessment. An assessment measures where you are today with respect to three main planning areas: Personal Preparedness, Financial Readiness and Business Attractiveness.
Personal Preparedness includes personal estate planning. Typically, estate planning involves getting your “house in order.” Usually, estate plans address what happens to your estate should you die or become incapacitated. This is especially important for business owners because they are counting on the sale of their business to fund their retirement and in an early death fund the retirement of their family. If you suddenly became disabled and couldn’t work, or you died prematurely, what would happen to your business? Would your employees continue to come to work after your funeral? Would they wonder if they would get paid? Would they wonder if your spouse is now taking over? Would some or all decide they need to consider finding a new job? What would happen to the value of your business if a large number of your employees left within a couple of weeks, would the business survive or maintain its value? We talk about maintaining a state of constant readiness – how can you get prepared for the unexpected?
Another area to assess is Financial Readiness. How much money will you need to fund your retirement? That is a critical question that your CEPA and/or Financial Advisor should answer for you. IF you know how much money you need, and you can estimate how much your savings
will become in retirement, then you know how much you need to net from the sale of your business at your exit. If you know how much you need to NET, then you can calculate how much it has to sell for to pay the taxes and the selling costs – this is the GROSS amount. If you know the value of your business today, and you know the gross amount it needs to sell for at your exit, then the difference is the Value Gap. A what rate would you need grow your business in order for it to become the gross amount in the time you has set for your exit? The answers to these questions are good places to start assessing your Financial Readiness.
How attractive is your business? Would someone else easily buy your business? This is a big question your CEPA can help you to assess. Essentially, a buyer will consider the business’s future cash flow. They will typically consider the risk associated with them buying the business and the persistency of those cash flows. Do the cash flows fall off if you aren’t there? This is a risk that I think keeps a larger percentage of business from selling – the perceived risk that the new buyer will not be able to replicate the sales you able to achieve. I was taking with one of our business owner clients the other day – he said, “Mark, I took your advice. Three months ago, I told my staff that I will no longer be coming in.” Wow, can you do that? Does your business run the same with you as without you? If it runs without you while you own it, and you offer it for sale to another buyer, I would submit that a buyer could see that buying it is less risky for them because your business can already operate without you.
The exit planning process is about assessing your current condition with respect to personal preparedness, financial readiness and business attractiveness. A CEPA can help you get started in framing a plan that gets you into a state of readiness, financially prepared for the sale of the business for the value you need to receive and getting your business in a condition that attractive enough to sell.
THE EXIT PLANNING INSTITUTE
THE STATE OF OWNER READINESS 2017 TWIN CITIES METRO AREA REPORT