Why every business owner needs an exit plan

For most business owners, leaving their business is likely to be the biggest transaction of their lifetimes—and the one that will have the biggest impact on their financial and emotional future. Yet more than 80% of owners have no written plan and nearly half have done no planning at all, according to the Exit Planning Institute. Why? Too often, it’s because they don’t know where or how to start.

Addressing this issue is important, particularly on the front end, while there’s still time to plan. It can save time and money in the long run, and help insure you get the maximum value for the company you worked so hard to create. Remember: some 75% of businesses that are for sale never sell. Those aren’t great odds. Exit planning can help.

Many confuse exit planning with succession planning, but they’re not the same. Succession planning is the process of identifying successors, and providing training and experience to successfully transition leadership and/or management within a business. Exit planning—which includes the critical element of succession planning—is a much more comprehensive analysis of all the factors that impact owners, their businesses and, just as importantly, their families.

Though exit planning is complicated, its goals are simple: to maximize the value of the business at the time of exit, minimize the owner’s tax liability, and simultaneously help the owner achieve their personal, family and financial goals. The process starts by identifying the owner’s goals and objectives in the areas of business value, personal and financial resources, life after the sale or other transaction, family considerations, and many others. It also includes contingencies for the four D’s: death, divorce, disability and departure.

Anyone who has ever been involved with helping someone sell a business, value a business or finance a business has had the experience of looking at a company and realizing that it’s not ready to be sold. Perhaps there are issues with the concentration of customers, or a lack of leadership to take over, or sloppy or no financials. There are also other factors that greatly impact a company’s value and its salability.

It’s particularly important for business owners to focus on exit planning now, because the competition for quality businesses is going to get tougher.

It’s estimated that in the next 15 years, $10 trillion will transfer from one generation to another. The vast majority of that wealth is in the 12 million businesses owned by baby boomers, of which more than 70% will change hands.

So, it’s a lot like the guy who stops while a bear is chasing him to put on his tennis shoes and hears his friend say, “You can’t outrun the bear,” to which he responds, “I don’t have to; I only have to outrun you.” Those who focus on their exit strategy will be better prepared when the time is right.

A well-designed and implemented exit plan is a powerful personal planning tool as well as a business planning tool. Done correctly it enables owners to accomplish many, if not all, of the following:

  • Create strategic options from which to choose
  • Preserve family unity and accord
  • Minimize or eliminate capital gains and other taxes
  • Maximize company value in good times and bad
  • Allow for retirement
  • Control how and when they exit

The process of exit planning is a multidisciplinary one that includes the business owner, their accountant, financial planner and attorney/estate planner at a minimum. It should also include an insurance professional, a mergers and acquisition specialist, or other business intermediary who can help sell and value the business. In this process, someone must be the lead advisor or team captain to make sure that there’s an adhered-to timetable.

Successful owner-executed exit plans can be done this way, particularly when one or more of the players has a good deal of exit planning experience. It’s important that the team collectively has expertise in many areas such as business valuation, corporate finance, estate and gift tax planning, life and disability insurance planning, and overall good business skills. And it’s vitally important that the lead advisor takes the responsibility for the “client deliverable.” This prepared report is then the plan for what needs to be done, when it needs to done and who is responsible.

There are many reasons to have an exit plan. Some are financial and some are emotional, which have a great impact on the business owner’s family. But in the end, it’s all about controlling one’s destiny and not being controlled by it. It’s about knowing what your business is truly worth and what a potential buyer sees as potential issues. It’s about having the peace of mind that the process as it affects the family is collaborative and not corrosive. We all know families where false hopes or half-truths destroyed the family unit. Most importantly, it’s about controlling something that will inevitably happen.

Remember, everyone is going to exit his or her business—it’s just a matter of how and when. So, don’t be like most business owners who spend more time on their family vacation than on exit planning. Know your future and plan for it.

This article was written by Camm Morton – franchisee VR Mergers and Acquisitions in Baton Rouge, LA.


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