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Demystifying Exit Planning

Business Owners’ Special Series No. 30 08.10.21

If you have many unanswered questions about exiting planning for your business, you are not alone. Most business owners suffer from a lack of useful resources and practical answers when it comes to answering these types of questions: 

  • When should I begin my exit planning?  
  • How do I get started?  
  • What practical steps should I take?  
  • What are the benefits of having an exit plan in place?  
  • What are the costs of not having an exit plan in place?  
  • Who can I go to for help?  

As a Certified Exit Planner, my job includes empowering my clients with knowledge, and these are questions that I often hear from business owners. Here are some of the things I share with them to help remove the mystery that so often surrounds exit planning. 

Let’s Start With When 

If an offer to buy your business arrived today, would your business be ready for a sale at the highest potential price? For most business owners the answer would be a resounding “no.” That is one reason why owners consistently leave millions of dollars on the table when they exit their business. 

A staggering 83% of business owners fail to have a written exit plan. It follows, then, that when an unsolicited offer to buy their business arrives, most businesses are not sale-ready. The price may seem nice, but it is often far less than it would be if the business were exit-ready. This means that the buyer is getting a price discount at your expense, and that should never happen.  

Getting the highest asking price for your business does not happen naturally. It is not a result of kismet or happenstance. There is no magic wand to wave, instantly raising your business’ value when the offer to buy your business arrives.  Making your business sale-ready requires a cohesive and strategic plan. It takes time, attention, focus and energy. Developing and executing an exit plan now will ensure that your business will always sell for the highest potential price, regardless of when the transaction takes place. There is no mystery about that. 

Furthermore, think about what will happen to your business if you are suddenly not here to run your business. What if you suffered a death or a permanent disability yesterday? Could your heirs sell your business without you, for the highest potential price today? If your business is not exit-ready when an unforeseeable event occurs, a fire sale price will likely be the result for your heirs. 

Having an exit strategy in place means three things:  

  1. You can sell your business at the highest price, at your convenience. 

  1. Your business will be sale-ready at the highest possible value when unsolicited offers arrive.  

  1. Your family will be protected: They will not have to sell the business at a fire sale price in your absence. 

Now is the time to invest your attention and energy in developing your exit plan. This will maximize your business’ value, secure your financial future, and protect your heirs’ financial well-being. It does not matter when you expect to exit your business; life is unpredictable and does not always go according to plan. The only astute time to prepare your business exit plan is now.  

The Question of How? 

  • The first thing you need to know is your current business value. Your accounting system may tell you many important things about your business, but it will never tell you the value of your business. Furthermore, do not rely on rules of thumb or free advice from friends and colleagues. In fact, do not rely on an opinion of value from anyone who will be compensated from the sale of your business: Instead, get a professional and objective opinion of value. The best thing to do is have a business valuation performed by a professional business valuation specialist. 

  • The next thing you will need is a personal financial planner. Your business is not an island unto itself. It is likely a major part of your net worth, and you need to understand how it fits into your long-term personal financial plan. This is where a good personal financial planner can help.  

You should determine how much wealth you will need when you exit your business to last through the remainder of your lifetime. A personal financial planner can help you determine this number. However, if your wealth is tied up in your business and in real estate, such as your home, then a financial planner may be difficult to find.  

In that case, wealth managers may not want to assist you because you do not have liquid assets for them to invest and manage. Financial experts who sell insurance and other products also may not be the most objective source of assistance since their main goal is to sell a financial product to you.  

In this instance, you may want to work with a fee-based financial planner. They will charge you for their time and expertise, but that is also the reason they can be so accessible and helpful. For example, they do not manage money for a living, so they do not require a “minimum investment” to provide you with financial planning advice. They do not have a financial product to sell so there is no hidden agenda. All this adds up to advice that can be accessible, helpful, and objective. 

  • Now you will need to maximize your business’ value. For most business owners, the business is their most valuable asset, so naturally they should want to maximize business value. Furthermore, it may be necessary to increase the business value if the current value will not satisfy your post-sale retirement or lifestyle needs.  While revenue growth can certainly increase value, there are many other value-enhancing opportunities immediately available to you. 

Become your company’s chief risk officer and seek out risks in your business. Risks reduce business value and buyers reduce their price as they discover risks in your business. It may be difficult for you to see the risks that buyers discover if they do not keep you awake at night. In that case, a certified exit planning advisor can help you see your business through “buyer’s eyes.” They can identify and remove risks to immediately increase value. Remember that risk can be found where you least expect it: in your customer base, within your management team, in your legal agreements, in owner-dependence, and in many other places that you may not notice when focusing on day-to-day operations. 

Your staff can also provide a wealth of value enhancement information. Employees may see opportunities to reduce waste and cut costs, which will make the business more profitable.  Employees who have direct customer contact may have ideas on how to improve customer service. They may also be aware of products and services that your customers are asking for and want you to provide. This could lead to expanding and diversifying your portfolio of products and services while mitigating unnecessary expenses. These are all value building opportunities. 

Another source of value enhancement is having a complete company “playbook.” Make certain that you have documented the processes and procedures at every level of your business operations. A business that relies on documented processes and systems has far more value than a business that is owner-dependent. Processes for how employees perform their duties that are not written down are not transferable processes, and that non-transferability reduces business value. Developing your playbook, by comparison, transforms your business into a turnkey operation that buyers will pay a premium to acquire. 

  • Organize all documentation in one place. Your company playbook is one pertinent document. Leases, contracts, vendor and customer agreements, employee information, key financial information, tax filings, and corporate governance are just a few examples of the many other documents buyers will want to examine before making an offer to buy your business. The point is that having all key documents in one electronic file at all times is an important component of always being sale-ready. 

  • Everyone needs to be on the same page. Make certain that all owners are on the same page regarding the exit strategy. This can include target sales price, terms of sale, timing of exit, type of buyer and deal structure. Co-owners must agree on exit terms in advance and commit them to a written exit plan. Deals often fall apart at the eleventh hour when co-owners realize very late in sale negotiations that they have different deal objectives and expectations. 

  • Expect the unexpected and have alternative plans. Every exit plan must include a contingency plan to be completely effective. You must anticipate that things will go wrong. For instance, if you are suddenly no longer here to see the business through to an exit, who will step in and fill your shoes? In the event of your death or disability, has someone been trained to take over your responsibilities? Your heirs and key employees must also know the contingency plan in case they have to implement it. They will need to know it in advance so there is no uncertainty, surprise, animosity, conflict or defection immediately following your sudden absence from the business. 

You may need some additional safety nets such as life insurance, disability insurance and long-term care insurance. Your heirs need to know where to find these insurance policies quickly, if needed.  

You must have an up-to-date estate plan. Your estate plan must be consistent with your exit plan and all contingency plans. Your family needs to know where to find these documents immediately, if needed.  

Your key employees need to have immediate access to your contingency plan as it relates to the continuity of business operation in your sudden absence.  

  • If a plan is not written, it does not exist. All the above components of your plan should be summarized in a written document. As you put it into writing, you will realize that each step can be broken down into smaller, more detailed steps. Each step should have a designated time to be completed, and the name of who is responsible for completing each item should be listed — because you cannot complete it all yourself. On business matters, you can assign action items to key employees. On personal financial matters, you can assign responsibilities to your significant other.  

The Last Question Is Who? 

Once your exit plan is a written document, you will have an effective exit strategy in place. Now you will be able to follow the actions steps in your plan, enhance business value, and be exit-ready at all times.  

Creating and implementing the plan, however, requires patience, persistence, and a relentless effort. It is easy to procrastinate, postpone or get distracted by day-to-day business operations.  

You may find that having the assistance of an experienced exit planning advisor can expedite the planning process, and help you develop your exit plan more efficiently. This is what certified exit planners do: They assist with creating an effective exit plan, including the action steps required to implement the plan. Exit planning advisors can also assist with the execution of the exit plan to ensure you pursue the necessary action steps through to completion.  

Exit planning professionals will identify other financial professionals that may be required and bring them into the planning process as needed. This may include CPAs, attorneys, insurance professionals and financial advisors.  

A certified exit planning advisor can also perform risk assessments and value enhancement assessments to increase business value. They can help you understand the range of potential values that businesses in your industry have sold for in recent transactions. An exit planning professional can help you understand the different types of buyers, because different types of buyers will pay different prices. Additionally, they can assist you in identifying the types of buyers that will align with your financial goals and any legacy intentions that you may have for the business.  

Be wary of financial professionals who say, “Call me when you are ready to exit.” This is the worst advice an advisor can give you, and yet it is all too common. You will likely receive unsolicited offers long before you are ‘ready to exit.’ Unforeseen circumstances may cause your survivors to sell your business long before you are ‘ready to exit.’ Your business should be exit-ready before these events occur and should be exit-ready at all times. “Call me when you are ready to exit” is a foolish advice that will result in exiting your business at a subpar value. 

You Must Know What’s Next 

The most overlooked, yet extremely important, component of a business owners’ exit plan is this: What will you do with your life after you exit your business? Let us say you are in good health, and your doctor says you can expect to have a long, healthy life. If you plan to exit your business at age 60, you may live another 30 or 40 more years thereafter. If you exit at age 50, you may live another 40 or 50 years. That is a long time. Therefore, you need a robust plan as to what you will do in your post-sale life. This is equally important as any other part of your exit plan.  

It is not uncommon for business owners to suffer depression during the first year after exiting their business. Yet, this is completely avoidable if your exit strategy also includes your post-exit life strategy. Your business may be where you spend most of your time and energy and it may also be your primary source of socializing with people, your creative outlet, your source of motivation, or your primary purpose for getting out of bed every day. You need to have an effective plan for what is going to replace all this when the business is no longer there to consume your time, energy and attention. 

Remember Why 

The purpose of your written exit plan is to make certain your business is exit-ready at all times, starting today. This will enable you to exit your business at the highest value, not matter when you exit, and no matter the circumstances. That is what exit planning will do for you and your loved ones if you start the exit planning process today. 

Discover More Exit Planning and Value Acceleration Insights   

This article is No. 30 in the Business Ownership Special Series (B.O.S.S.), an ongoing cycle of informational guides from BPM designed for business owners who are proactively seeking guidance from experts on how to implement value acceleration in their business, delivered each month straight to your inbox. For more insights, download our e-book, “Value-Focused Business Planning,” and check out the rest of our B.O.S.S. articles.