What’s in a Good Exit Plan?Submitted by Business Owner Succession Strategies on February 13th, 2020
We understand that business owners are so busy addressing today’s economic challenges that they can overlook the critical task of exit planning. We also understand that, at some point:
- All owners exit their businesses; and when that date arrives,
- Owners want to exit on their terms; the most important of which are financial independence and ability to choose the person or entity that will receive or buy the business.
In our article “Why Exit Planning? Why Now?” we listed several compelling reasons to create a plan to make this happen. Designing a comprehensive exit plan that is based on your exit objectives and flexible enough to adapt to changing economic, business and personal circumstances can be the difference between liquidating your company and selling / transferring it for millions of dollars.
Let’s look at the characteristics of a good exit plan in light of an unfortunately common story of two hypothetical business owners who failed to plan.
Jim and Tim McCoy were the owners of a thriving construction company. As successful as they were, the McCoys were tired of navigating the labyrinth of government regulation and of paying ever-increasing taxes. Ultimately, the day-to-day grind of running a multimillion dollar company had taken its toll.
For the McCoys, a sale to a third party was not feasible, not only because neither brother was willing to remain with the company after a sale, but also because they had failed to develop a strong management team. Few savvy buyers will purchase a company without a great management team committed to remain after the sale.
Transferring ownership to one or more key employees was also out of the question. None had been groomed to assume ownership responsibilities, nor had the McCoys taken action to fund this type of buyout.
Transferring the company to children was impossible, because the children of both owners were too young to be active in the company.
The McCoys’ 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 jobs, and Jim and Tim left millions of dollars on the table.
How can you avoid the McCoys’ fate?
- Plan Ahead. The issues Jim and Tim ignored (among them grooming a management team and developing a plan) 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 transferred; and c) adds to the value of your business. In our experience, most owners with exit plans need five to ten years to implement all the strategies necessary to exit successfully. Owners without exit plans spend far longer than that waiting and hoping for a buyer.
- Set Measurable Goals. Your exit plan must set goals, provide accountability and measure results. This is especially important when one goal is to protect and grow value, and minimize taxes.
- Incorporate Flexibility. Create a plan with the flexibility necessary to react quickly and effectively when the unexpected happens.
- Use A Proven Process. Ultimately, we suggest that you engage in a proven seven-step exit planning process that has helped thousands of owners to exit in style. One way to look at our exit planning process is to associate each step with a question. As you move through the process, you will be able to answer “Yes” to each one.
- Step One: Setting Exit Objectives. Do you know your retirement goals and what it will take—in cash—to reach them?
- Step Two: Determining Business Value. Do you know what your business is worth today, in cash?
- Step Three: Increasing Business Value. Have you identified the best ways to increase the value and cash flow of your company?
- Step Four: The Third Party Sale. Do you know how to sell your business to a third party without getting killed by taxes? (or)
- Step Five: Transfer Your Business to Insiders. Do you know how to transfer your business to insiders (family members, co-owners, or employees) for cash rather than give it away?
- Step Six: Protect Your Business. Do you have a continuity plan for your business should you die or become disabled?
- Step Seven: Protect Your Family. Do you have a plan to ensure 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.
*This is for general information and illustrative purposes only. LPL Financial and Business Owner Succession Strategies Group (BOSS) does not offer business valuation services. Please contact an outside professional if you need assistance with business valuations.