Everyone will exit their business at some point – it is inevitable! And most contractors, with no exit plan in place will simply close their doors leaving years of client good will, established contractor and supplier relationships, and dedicated employees to simply go away when those respected company doors close.
Owners can remove themselves from daily operations with some foresight and planning with their eventual exit in mind. This does not happen by chance – it happens when a strategic plan is implemented in a thoughtful and deliberate fashion.
What does this look like? I have included a short outline of this process below:
- The Exit Planning Roadmap:
- Set goals/timeline
- Quantify resources
- Grow transferable value/minimize risk/taxes
- Reviewing a potential sale to:
- To a 3rd party
- To co-owners/key employees
- Business continuity/estate planning
- Three universal goals:
- How much money do you want when you leave your business?
- To whom do you want to transfer the business?
- When do you want to exit?
You must begin planning and executing a strategy to accomplish your exit goals well before you are ready to leave. Otherwise, it is highly unlikely that the business will be ready for transfer when you are ready to transfer it.
Here are the outcomes that every business owner strives for exiting their business:
- Having the financial security
- Ensuring that their chosen successor(s) are in place when they leave
- Beginning their purposeful new life
Design and Create Your Exit Plan:
Most Plans require almost a year to create. Most owners need time to ponder and weigh alternative paths and to think through the many issues that arise when they move through this exit planning process.
Close the Value Gap
There is likely a gap between the value (money) you need to receive for your ownership interest and the value you are likely to receive if you transfer the business today. The time it takes to close that value gap depends on the following:
- By how much does the business need to grow?
- What is a realistic growth rate for your business in today’s economy?
- What is the estimated growth rate of your non-business investment assets?
The time required to close the value gap is the wildcard in estimating when you will be able to leave your business. The surest way to create sustainable growth is to create a written growth plan that includes deadlines and accountability as part of your overall Exit Plan.
I find that most owners are in denial when it comes to objectively quantifying the size of their value gaps and determining exactly how they are going to close them within their planned departure time frames. The reason behind the denial of what is generally a large gap is that most owners have no plan to close it other than “work harder.” Owners frequently do not know how to build value consistently at the pace necessary to achieve financial independence.
Tax planning and implementation
Part of reaping full value for your company involves minimizing taxes. Fortunately, planning can legally minimize (or even eliminate) taxation upon the transfer of ownership interest and save on taxes annually. Of course, the IRS does not make this easy. Regardless, if you leave tax planning until you are ready to exit, the IRS wins.
Transferring Your Business to Children or Employees
It is possible to transfer your entire ownership to a child or employee by simply transferring ownership in exchange for a promissory note. However, this can be a form of financial suicide. If you wish to transfer ownership to children or management while achieving your financial and other objectives, you need time to do the following:
- Grow business value and cash flow. As growth occurs, you benefit from increasing distributions of excess business income and can invest the net proceeds in non-business investments.
- Develop the incoming owner’s management and ownership skills.
- Begin a methodical transfer of small amounts of non-voting ownership to children or key employees based on their achievement of pre-set performance standards. During this time, you retain full control of the business until your children or management can pay cash—enough to ensure your financial security—for your ownership interest.
- Ultimately transfer the balance of your ownership interest for cash after your children or key employees have acquired sufficient equity to borrow money to pay for your remaining ownership interest.
Or Selling Your Business to an Outside Third Party
Assuming your transaction advisor determines that you are likely to receive the money you want from the sale of your business, your last step before beginning the sale process is to engage in pre-sale planning. This involves having your advisors review the structure and operations of your company to discover and properly bury any “skeletons” that might stall or halt the sale process.
A few examples of skeletons are potential lawsuits, disgruntled minority owners, and any accounting discrepancies. These skeletons can derail the sale process in its tracks.
An adage of deal attorneys is that “time kills deals.” You do not want correctable problems to cause delays and the pre-sale planning process helps prevent this. Pre-sale planning takes but a few months, but correcting problems that are discovered can take several more months. Once remediation is completed, the sale process begins and is usually complete within a year. Obviously, if your transaction advisor has good reason to believe that your business cannot be sold for the price you need, you will need more time to accomplish all of the actions necessary to close the value gap.
I am confident in saying that almost all owners today are ready to exit their businesses long before their businesses are ready to be exited. If the time before the business can be successfully transferred drags out for years after owners feel ready to exit, those owners face burnout and frustration, and lose interest in the business, making it even hard to build its value.
The pie-chart below reviews the key considerations in any business transfer. If you would like to review a free exit planning assessment to identify your company exit priorities, e-mail me at David@RemodelForce.com. The evaluation takes less than 30 minutes to complete!