The numbers are overwhelming: there are more than 12 million businesses in the United States, and over the next five to seven years more than half of these companies will change hands. Of the six million owners who will sell their businesses in the next several years, most will not take specific steps to ensure a smooth transition from their ownership. Even for the few owners who have made an attempt to plan for their exit, their efforts usually fall far short of a comprehensive exit plan.
Two reasons most often cited by business owners for their not having a comprehensive plan for their exit are: being too focused on the day-to-day requirements of the company to take the time to plan, and uncertainty over how to begin exit planning due to a lack of comfort with how the process actually works. There are fundamental steps every business owner needs to go through to create a sensible and effective exit plan that fits his or her situation.
The most effective exit planning process includes seven individual steps. Each step builds off of the others to create a comprehensive plan that guides the owner through the day they exit the business. These steps are designed to follow a sequencial logic.
Determine the owner's exact financial (cash needs) and personal goals for retirement. The key here is to be as detailed as possible in articulating the goals; the more specific the goals, the more specific and effective the exit plan.
Understand the (cash) value of the business today. Ownership in the business is usually either/both an owner's most valuable (cash) asset, or the asset that is most likely to be the catalyst needed to realize the owner's personal goals.
Identify specific, realizeable steps to preserve, promote and protect the value of the company through the exit. The most common application of this step involves the motivation and retention of key employees, but might also include areas such as priming the pump to increase sales, taking measures to protect profit margins, shoring up financial reporting systems, and dealing with potential liability issues.
Exploring selling the business to an outside (third) party. This is often (sometimes mistakenly) viewed as the best option for maximizing financial objectives in an owner's exit. An important element within this step is to understand the tax consequences of a sale, and what might be done to maximize the after-tax proceeds.
Evaluating the dynamic of selling to an inside party (employees or family members) against tax implications and the owner's need for financial security. Almost 75 percent of all business transfers are to inside parties, yet these transfers are the most complicated because insiders usually have the weakest financial (cash) resources to effect a buyout, and are the most tax-sensitive (especially for family members facing estate tax issues).
Creating a continuity plan for the business to guard against the death or disability of the owner. This step is crucial because no exit plan can stay on track if the owner's unexpected absence is not addressed. The continuity plan tackles issues such as ongoing capital needs of the company, allowance for changes in decision making systems, specific actions to be taken with the balance sheet and operations, and other related items.
Ensuring the exit plan maximizes the value of the owner's estate. This final step is in place to make sure the exit plan and estate plan are in sync. This includes checking that the income/wealth needs of the family (spouse and heirs) can be adequately met within the parameters of the exit plan, and that the exit plan ensures the equitable distribution of assets. It also involves reviewing the income/wealth needs for tax efficiency purposes.
The process just described is valuable in large part because each step along the way is clearly identifiable, making it easy to stay on track to complete an exit plan. The most crucial element to starting and staying with the process is having an advisor team committed to exit planning. In addition to a team leader, the advisory team should include those professionals who play an important element in both creating and servicing the owner's exit plan. These advisors most often include the owner's lawyer (corporate and estate), accountant, personal insurance agent, and financial planner. The team may also include the lead banker, company valuation specialist, business consultant, and other advisors who have an easily identified value to bring to the owner's exit plan.
At some point every business owner leaves their business, whether voluntarily or not. For most business owners, if given a defined process that can be easily followed, the fear and procrastination attendant to addressing their business exit can often be turned from a negative into a positive experience.
Clayton Capital Partners is a St. Louis-based investment and merchant banking firm specializing in business. For more information, contact Will Lindenmayer at 314-725-9939
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