You will be leaving your business. It will happen! This is something every business owner will need to address. Owners begin thinking about the transition or exit planning process when two streams of thought begin to converge. See if this looks familiar. The first stream is a feeling that they want to do something besides go to work every day:
- Either they would like to be someplace else—doing something else—
- Or they simply no longer get the same kick out of doing what they are doing
The second stream is the general awareness of the following:
- They are close to financial independence
- They are making significant strides toward reaching financial independence
- They can achieve financial independence today by selling their businesses
While each exit plan is as unique as the owner who creates it, a carefully crafted exit plan has several signature characteristics:
- They aim to increase business value
- They are put into writing so that all involved can measure their progress toward the owner’s goals
- They incorporate accountability by holding the owner and each participant to deadlines for completing each task
The Exit Path Road Map:
Set Exit Objectives/Goals:
Many contractors do not set exit objectives precisely because it is too emotionally wrenching to contemplate separating themselves from a business they have created, nurtured, lived with, suffered with, brought to maturity, and in which they have totally immersed themselves. Your exit plan should be based on your goals. It is difficult, if not impossible, for any planning professional to engage you in the exit planning process until you are emotionally prepared to begin planning to leave your business.
There are three straightforward exit objectives that once established, allow owners to cut through a lot of muddled thinking that otherwise bars them from moving forward.
These 3 exit objectives are as follows:
- Knowing how much longer they want to work in the business before retiring or moving on
- Determining the annual after-tax income they want during retirement (in today’s dollars)
- To whom they want to transfer the business:
- Key employees?
- Outside third party?
- Employee stock ownership plan (ESOP)?
No owner can effectively begin planning (or acting in an efficient and coordinated manner) to leave his or her business without establishing each of these objectives. Many owners will also set other objectives, such as the following:
- Maintaining family harmony
- Providing for one or more employees
- Transferring wealth to family members
- Getting maximum value for the business
- Living a life of significance
- Giving to charity
Remember, your goals and objectives direct all subsequent planning efforts and actions. You are the person primarily responsible for this step, but you do not need to work alone. Who can help? Owners do not need to reinvent the exit planning wheel themselves. I have experience in creating and implementing exit plans for owners in the construction industry.
Quantify Available Resources:
A universal ownership objective is to secure the income stream that you (the owner) and your family will need to support a future lifestyle. The following three elements constitute your financial resources:
- Business value
- Projected business cash-flow
- Non-business sources of income
A Word About Business Value:
Knowing the value of the business is critical to the planning necessary to successfully exit your business because for most owners, their businesses are their most valuable asset. Accomplishing financial goals depends on converting that asset to cash. Based on owners’ knowledge of the current value of their businesses, owners, with the help of key advisors, can determine the following:
- Whether an owner’s financial objectives can be met at present through a conversion of business value to cash
- How much the business’ value must grow in-order to reach the owner’s retirement objectives (this is more common than the preceding point)
- Whether, and how quickly progress can be made to those financial goals
Focus on Business Value:
There are three parts to focusing on business value:
- Protecting existing value
- Increasing the future value of the business
- Minimize current tax liability and general liability when you transfer ownership
Increase Business Value:
An inevitable byproduct of a consistently well-run business is consistently increasing value. There are numerous actions an owner can take to maximize value. These include the following:
- Maintaining and consistently increasing cash flow
- Documenting the sustainability of earnings
- Motivating and keeping key employees
- Creating and using efficient systems
Increasing business value goes to the heart of a successful business and to the essence of your role within the business: to enhance value.
A future buyer may not even consider purchasing your company if there is a risk that its value will decrease. Have you taken steps to make sure your key employees stay with a new owner after you exit?
Develop a Contingency Plan for the Business:
One of the benefits of developing an overall exit strategy is that you quickly appreciate how contingency planning is an integral part of it. Taking effective measures so that your business survives if you do not is a natural part of the exit planning process. In an ideal situation, business-continuity needs upon the death or incapacitation of an owner can be met by a business-continuity agreement with a co-owner. However, most businesses are solely owned. If sole owners do nothing else, they have a duty to their families and businesses to create written plans that answer the following questions:
- In my absence, who can be given the responsibility to continue and supervise daily business operations?
- Financial decisions?
- Internal administration?
- How will these people be compensated for their time and, most importantly, their commitment to continue working until the company is transferred or liquidated?
- What should happen to the business upon my death or permanent incapacitation?
When owners make the decision to begin transferring their businesses, the last thing they are likely to consider is the need for adequate planning to protect the business if they should suddenly die or become incapacitated. Yet, this is precisely the point at which the business is most vulnerable: It has peaked in value, but the event creating liquidity (i.e., the sale of the business) is likely years away. The remedy is usually straightforward: adequate legal documentation in the form of a buy-sell agreement or a stay-bonus program that includes adequate funding for important employees.
Develop a Contingency Plan for the Owner’s Family:
With this last step, your exit planning process comes full circle. Review your financial objectives established in the first step:
- If you do not survive until your business exit, which financial resources will your family need and where will they come from?
- Which actions can you take to minimize or avoid estate taxes?
As a business owner your estate plan is another part of your overall exit plan. Unlike some of your lifetime objectives (e.g., financial security), estate planning objectives and business-continuity objectives are relatively easy to meet upon your death or incapacitation. To acquire the liquidity sufficient to meet your financial objectives, consider the purchase of life insurance and disability insurance. You may be surprised by how easy it is to meet after death objectives using insurance.
Once owners complete the first two steps of the process (setting objectives and quantifying available resources), they can jump to this final step (preparation of appropriate estate planning documents and funding financial needs using insurance) so they can minimize the financial impact their death would have on their families and their companies’ ability to survive.
All the techniques that produce operational business success (learning from mistakes; developing business strategies based on experience; and conducting business efficiently and effectively) do not guarantee a successful business exit.
Sadly, the valuable experience owners develop over the course of their business lives does not equip them to leave their businesses successfully. Experience, learning, and trial and error all require time, a luxury most business owners do not enjoy as they approach the end of their ownership lives.
All this planning sounds complex and time consuming, but it does not have to be. I can help you create a comprehensive exit plan that gets you the money you need, achieves all of your other objectives in a time and cost-efficient manner, and meets the following criteria:
- Based on your objectives
- Includes each of the steps summarized here
- Holds you (the owner) and all advisors accountable
- Provides a means of measuring your progress toward a successful exit
- Imposes deadlines to ensure that you and your advisors act in a timely manner
Armed with a written exit plan, a team of experienced advisors, and with (ideally) several years before you exit, you can optimize your ability to leave your business in style. If you would like to do a free exit planning assessment to better plan your eventual exit, let me know. You can contact me at firstname.lastname@example.org.