What’s In A Good Exit Plan?

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How to begin the process of leaving your business

By Anthony G. Bianchi & Jordan A. Freedman

In this day and age of technology and crazy schedules, it is understandable that business owners are so busy running their businesses that they can overlook the critical task of exit planning. It is also understandable that, at some point, all owners will exit their businesses. When that day arrives, owners will want to exit on their terms, the two most important of which are financial independence and choosing the person or entity that will buy the business. Designing a comprehensive exit plan—based on your exit objectives and flexible enough to adapt to changing economic, business, and personal circumstances—can be the difference between liquidating your company and selling it for top dollar. Let’s look at the characteristics of a good exit plan in light of a sad, but common story of two business owners who failed to plan, as told by an exit planning advisor.

Several years ago, we met with Jim and Tim McCoy, the owners of a thriving construction company. Our business-planning meeting quickly turned into a “We are getting out of business so how do we do it?” meeting. As successful as they were, the McCoys were tired of navigating the labyrinth of government regulation and paying ever-increasing taxes. Ultimately, the day-to-day grind of running a multimillion-dollar company had taken its toll. For the McCoys, a sale to a third party was not feasible, not only because neither brother was willing to remain with the company after a sale but also because they had failed to develop a strong management team. Few savvy buyers will purchase a company without a great management team committed to remain after the sale. Transferring ownership to one or more key employees was also out of the question. None had been groomed to assume ownership responsibilities nor had the McCoys taken action to fund this type of buyout. Transferring the company to children was impossible because their children were too young to be active in the company. The McCoys’s only exit option was to liquidate: their highly profitable company had little worth beyond the value of its tangible assets. After the liquidation sale, dozens of employees lost jobs, and Jim and Tim left millions of dollars on the table. So how can you avoid the McCoys’ fate?

Plan ahead

The issues Jim and Tim ignored (e.g., grooming a management team and failing to plan) proved to be their downfall. These and most other issues—if addressed in advance of your exit—can be resolved in a manner that (a) is cost efficient, (b) enables your business to be transferred, and (c) adds to the value of your business. In our experience, most owners with exit plans need five to 10 years to implement all strategies necessary to exit successfully. Owners without exit plans spend far longer waiting and hoping for a buyer.

Set measurable goals

Your exit plan must set goals, provide accountability, and measure results. This is especially important when one goal is to protect and grow value, and minimize taxes. Incorporate Flexibility. Create a plan with the flexibility necessary to react quickly and effectively when the unexpected happens.

Use a proven process

Ultimately, we suggest that you engage in BEI’s Seven Step Exit Planning Process, which has helped thousands of owners exit in style. One way to look at BEI’s exit planning process is to associate each step with a question. As you progress through the process, you will be able to answer “Yes” to each one. (Note: If you pursue step four, step five will be irrelevant, and vice versa). The thoughts and actions that go into answering these questions constitute your unique exit plan.

Step One: Setting exit objectives

Do you know your retirement goals and what it will take—in cash—to reach them?

Step Two: Determining business value

Do you know what your business is worth today, in cash?

Step Three: Increasing business value

Have you identified the best ways to increase your company’s value and cash flow?

Step Four: The third-party sale

Do you know how to sell your business to a third party without getting killed by taxes?

Step Five: Transfer your business to insiders

Do you know how to transfer your business to insiders (family members, co-owners, or employees) for cash rather than giving it away?

Step Six: Protect your business

Do you have a continuity plan for your business should you die or become disabled?

Step Seven: Protect your family

Do you have a plan to secure your family’s financial security should you die or become disabled?

Anthony G. Bianchi and Jordan A. Freedman are with NRL Wealth Creation Strategies. Contact Jordan at jordan.freedman@nrlagency.com, a member of BEI’s International Network of Exit Planning Professionals.

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