What is Exit Planning?
Exit planning is the process of developing a comprehensive roadmap which defines the specific steps and actions required for a successful business transition. The primary intent of the exit plan is to maximize the value upon exit and achieve the seller’s objectives. The steps to maximize the value of the business and increase the attractiveness of the business overall to prospective buyers must be considered within the context of the seller’s objectives as well as legal, financial and tax implications of the sale of the business or other exit method desired.
Why is Exit Planning Needed?
Many small to mid-size business owners have a significant portion of their Net Worth tied to their business. For these business owners, a thoughtful approach to their exit from the business will, in most cases, have a significant impact on their lives at exit and for many years thereafter as it may prove to be the most substantial financial decision of their lives. Seeking to maximize the value derived from the sale needs to take into consideration external factors (i.e., industry growth / attractiveness, macroeconomic conditions, etc.) as well as the performance and attributes of the business.
The seller’s objectives, both financial and otherwise, may not be congruent with the current state of the business. For example, an owner’s perspective of the business’s value may not be based in reality.
How to Develop an Exit Plan?
1. Establish Clear Objectives
The owner must clearly be able to articulate his / her objectives with the business as well as with their life after the business. This includes when to sell the business, for how much, to whom the business should be sold (i.e., family member, investor / entrepreneur, or to strategic buyer, etc.), and other general conditions and terms for which an exit would be facilitated.
2. Establish the Current Business Valuation
Knowing what the owner seeks in financial value upon exit is not enough to warrant a matching sales price. Instead, the owner needs to have a business valuation performed to assess any gap in value between desired outcome and realistic outcome in the market.
3. Value Creation and Realization
Value drivers – characteristics and attributes of the business which act as levers to increase value must be established. The gap analysis between owner’s expectations and business valuation is assessed through the lens of what adds or subtracts from the business valuation.
4. Determine Optimal Sale Structure
Working with a qualified business intermediary, in conjunction with qualified accountants and attorneys, a strawman structure of the business sale should be constructed to maximize value of sale, address liabilities, and minimize tax impact.
5. Marketing the Business
A qualified business intermediary who is able to tell the compelling story of the business’s origin and future is critical to the success of a sale. Financial data is only one set of data elements that need to be considered. Objectively identifying the opportunities for growth including how to address current business areas of improvement demonstrates the ability of the business owner to put themselves in a prospective buyer’s shoes. Additionally, as the owner of the business, a seller will have intimate knowledge of the challenges and competitive forces encountered as well as practices that were confronted or well-received.
6. Sale or Transfer of Business
The process of selling a business can be complex and time-consuming. The value of engaging a qualified and certified business intermediary to assist with the sale cannot be understated. The experience a certified business intermediary brings will allow for identifying obstacles / contingencies ahead of time, developing mitigation plans and negotiating strategies, and the ability to see that all elements (i.e., legal, accounting, compliance, regulatory, financing, and operational) are planned for and addressed adequately.