This article is the third in a series on Exit Planning for owners of privately held businesses.
In my first and second articles, I wrote about the advantages of having an exit plan and the various exit options available. This article is intended to generally outline the exit planning process. The flow chart below gives us a general overview of the process. Chart Source: Exit Planning Institute
This flow chart is a road map for navigating the exit planning process. There are many issues to consider when formulating an exit plan. Someone trained and skilled in the actions necessary will ensure that all possible avenues are explored and the option(s) that most closely mirror their client’s goals and objectives are pursued.
The process is divided into 4 major sections.
This component is the most crucial and sets the framework and drives all subsequent planning activities. Ultimately, it’s all about the owner and their spouse/family. The owner is interviewed and completes questionnaires designed to encourage them to carefully consider their hopes, wants and desires for the future. Questions such as;
Ø Are they mentally prepared to exit
Ø What are their lifestyle and financial expectations/needs post exit
Ø Would they prefer family take over the business or sell to a 3rd party
Ø Do they have any philanthropic or charitable aspirations
Once the owner establishes their goals and objectives in the previous section, an analysis of the business is necessary to see if it can support those goals and objectives. Unfortunately, this is where reality rears its ugly head. Certain exit options may be eliminated because the business simply can’t support. In this section, the owner’s financial condition is assessed through analysis of;
Ø Value of the Business
Ø Owner’s real estate and financial assets outside the business
A detailed business valuation is performed to, not only establish the value of the business but, identify potential value enhancement opportunities. Although the current business value may not support the owner’s after business financial needs, there may be an opportunity to increase that value over a relatively short period of time (2-3 years). Typically, there are many items that can be “tweaked” in the short term to make the business more attractive to 3rd party buyers or, funding sources, such as banks, that may be necessary to bring in to finance a family transfer. Completion of this section gives us a clear picture as to what the owner’s net proceeds may look like after the business is transferred.
The owner’s financial advisor, attorney, accountant and other professionals are consulted on the status of the owner’s long range plans and any weaknesses are identified.
All viable exit options that meet the owner’s objectives and goals that can be supported by the business are fine tuned and presented to the owner for review. This section of the process typically includes:
Ø Exit Options Analysis Findings with a specific recommendation pending owner approval
Ø Personal Action Plan
Ø Business Action Plan
The personal action plan may include recommendations on reallocation of existing assets to spouse or family to help minimize estate and capital gains taxes, establishment of a trust type vehicle to shield monies from estate/capital gains taxes and/or, various life insurance options may be explored.
The business action plan includes any value enhancement opportunities, both long and short range, that may make the company more appealing to a buyer or lender, recommend a succession plan for leadership of the company after the owner has transitioned out of the business, and identify key employees who would need to be retained by offering various incentives.
Many business owners have gotten to this point in the process and failed to execute. While the Exit Plan is somewhat adaptable, changes in the variables that led to the exit planning choices may render the plan less effective if not implemented for long periods of time. This is the part of the process is where all of the owner’s advisors execute their tasks as outlined in the personal and business plans mentioned in the previous section. Plan tasks are carried out such as; the owner’s attorney updating their will or buy sell agreement, putting life insurance in place as a means to pay estate taxes upon the owner’s passing or, implementation of value enhancement opportunities.
In all, the exit planning process is an integrated approach that allows owners to address all of their Business, Personal, Legal, Financial, Tax and Insurance issues involved with exiting their business. The process requires diligence and someone to keep an eye on the ultimate goals of maximizing the value of the business, minimizing estate and capital gains taxes and, perhaps most importantly, maximize the owner life after business satisfaction.
Are you ready to start your exit plan?Cliff Olin, MBA, CM&AA, CEPA and principal at Olin Capital Advisors, a small to mid market, mergers and acquisitions advisory and exit planning firm. Cliff is a Certified Exit Planning Advisor and has spoken to many groups regarding Exit/Transition Planning. He can be reached at firstname.lastname@example.org