Developing an exit plan is the most important thing a business owner can do to protect the value of their business and avoid a “worst case” scenario. An exit plan is a comprehensive roadmap that addresses all the business, personal, financial, legal, and tax issues involved in selling a privately owned business. A good exit plan includes contingencies for illness, burnout, divorce, and even death. Its purpose is to ensure the survival of the business; to provide continuity to the company’s employees, customers, and vendors; and to preserve wealth for the owner’s family.
In our experience, most business owners find it difficult to find the time to plan for how and when to exit their business. Anecdotally, over half of former business owners regret selling their companies less than a year after the sale. Without proper exit planning, business owners end up not reaching their financial or personal goals after existing their business. Often, business owners are reactive and “forced” to sell because of change in business conditions, burnout, health issues, or even marital problems. As a result, many business owners exit their companies without maximizing the business’ value and end up being disappointed in the end.
Consider the results of the following scenarios:
No Predetermined Exit Plan
- Undervalue the company and leave hard-earned wealth on the table
- Pay too much in taxes
- Lose control over the process by being reactive, rather than proactive
- Post ownership life for the owner and the company does not reflect the owner’s desires
Well-designed and Implemented Exit Plan
- Control how and when an owner exits
- Maximize company value in good times and bad
- Minimize or eliminate taxes
- Ensure the owner achieves stated business and personal goals
- Have strategic options from which to choose
- Reduce uncertainty for the owner’s family and employees
Six Elements of a Successful Exit Plan
- Create a concise statement of business goals, personal goals, and family/estate goals, including measuring financial readiness and business health of the company, and establishing a time frame in which to sell.
- Have a detailed business valuation performed to establish a baseline value for the business.
- Develop a plan to help identify specific ways to enhance the value of the business prior to the owner’s exit. This plan should consider making sure the company has a strong management team in place and the business model is sound and profitable.
- Generate an analysis of the pros and cons of different exit alternatives, such as a third-party sale, management buyout, family succession, sale to private equity or venture capital company, or liquidation.
- Engage an accountant to help with detailed tax planning to minimize any capital gains, ordinary income, and estate taxes related to the exit.
- Finally, implement the action plan that details the specific personal and business steps that must be taken to prepare for the owner’s exit.
Any business exit plan should be focused on two main objectives: 1) maximizing the company’s value prior to exit, and 2) ensuring that the owner accomplishes all of the business and personal objectives as part of the exit.
Sticking to an exit plan is just as important as having one. Any business owner should meet with their advisors on a regular basis to ensure that crucial steps are being completed on schedule. Utilizing professionals, such as accountants, attorneys, and business brokers, is essential to develop a good exit plan. This assistance can help maximize value, minimize taxes, provide for the future, and most importantly, provide a business owner with a clear, distinct pathway to exiting their business. Selling a business can be like selling your most prized possession. The cost of using trusted professionals in helping a business owner market and sell this prized possession is usually small compared to the additional value received at the time of sale. After all, exiting a business is probably going to be the most important deal of a lifetime.
For more information about exit planning, please contact the trusted advisors at MichaelSilver at 847-982-0333.