Your Exit Plan: The 3 Inarguable Reasons to Start NOW
What is Your Business Exit Plan? If you’ve ever done a business plan for the purpose of raising capital, one of the key questions is “What is your exit plan?” Many business owners think that question is self-serving, intended merely to let the venture capitalists figure when and how they will get their return on investment. In truth, however, that question is far more important. A business exit plan is a strategic plan with an end date. Putting a time frame on your plan, and defining the goals to be achieved by that date, creates a future-focused mindset for the owner. It controls and reduces your tendency to prioritize daily firefighting over long term thinking. It provides you with a yardstick to measure progress. Most importantly, it affects your thinking about almost everything in your business. Here are the 3 inarguable reasons why you should start your exit plan now. Reason 1: It’s Never Too Soon In my years of working with business owners, I’ve helped many transfer their businesses to family and employees. I’ve worked with others who sold their companies to a third party for tens of millions of dollars. Surveys show that many owners have regrets afterward. Others happily move into the next phase of their lives or careers. A few have seller’s remorse. On the other end of the spectrum, some come to the realization that they hated their business owner lives for years. The majority feel that they received a reasonable reward for monetizing their work of decades. None of them. NOT ONE of them has ever said “I spent too much time planning.” It’s likely that the sale of your business will be the most important financial event of your life. There are a few lucky owners who have wealth outside or beyond the value of their businesses, but for most of us monetizing those decades of effort is the culmination of our working careers. If your exit plan is to transfer to family, you can choose vehicles like Grantor Retained Annuity Trusts (GRAT) or Self Cancelling Installment Notes (SCIN). These may have to be in place for years to substantially reduce or eliminate taxable proceeds for you and/or your heirs. In a sale to employees, developing the documentation that shows their assumption of managerial responsibilities over time is a basic qualification for SBA loan approval. That, plus developing their “down payment” equity, punches the ticket for you to walk away with your proceeds in pocket on the same day that you cede control of the company. In a sale to third parties, the condition of the financial markets at your time of exit will decide the size of your multiple. Preparing your business with due diligence in mind, and understanding the different classes of buyers, allows you to better choose the time, method, and proceeds of your transition. Although it is difficult to time the stock market, shifts in acquisition multiples take much longer to develop. Being prepared allows you to enter the market while prices are at a peak. Five years is reasonable planning time. Ten years is better. There is no time frame that’s “too far out” to be thinking about your exit. Reason 2: It Changes Your Thinking It’s difficult to run a business without being reactive. Employee issues, customer problems, and vendor policies can shift your priorities on a daily basis. When your exit plan is in place, you have a broader perspective. Every decision you make is now in the context of “Does this support my bigger picture?” There are numerous examples. Hiring: If your exit plan is to pass the business on to your children, then hiring becomes a support function. You look for employees who can fill in areas where your offspring lack the necessary skills or don’t have an interest. If you plan to sell to employees, then you are looking for a Successor in Training (SIT). That is someone who shares many characteristics with you. If you are selling to a third party, you want a Second in Command (SIC). That is someone who compliments your strengths, and who can be contractually incented to stay on the job with a new owner. Securing a management team adds considerable value to any company. Lease vs. Buy: If your plan calls for selling to someone who is likely to relocate the company, or who already has your production capabilities, you may want capital equipment to be easily disposable. A competitor or much larger acquirer may want to leave the equipment out of the transaction. In a Main Street business, you may choose to have a strong tangible asset base for an entrepreneurial owner to use when obtaining acquisition financing. Real Estate: Should you own your building? Some buyers (say a publicly-traded acquirer) prefer to lease space. In that case, owning your building could provide a post-transition income stream in your retirement. On the other hand, a relocated company could stick the owner/landlord with a special purpose building that requires significant remodeling to be rentable. These are just a few of the decisions that are better made in the context of your long term plan. The decisions you are making in your business today all have lasting implications. Reason 3: A Plan is not an Action If you are taking a long trip, you likely determine the route before you start out. If it is complex, you may print out the directions. Nonetheless, you are still likely to use a navigation app to alert you to problems along the way, like traffic jams or construction. But everyone understands that printing out the directions isn’t the same as beginning the journey. You might take that step days or even weeks before actually getting into your car. It’s the same with your exit plan. Choosing your time frame and preferred method of transition isn’t the same as making it happen. Writing it down is a key component of preparation, but it shouldn’t be confused with implementation. Starting Your
Exit Planning: It can wait until tomorrow, right?
When asked about succession or exit planning, have you given one of these responses? “I think I will leave my business in three to five years.” “The operation still needs me.” “The business is not ready to be transitioned.” “We are too busy to worry about succession.” “I will easily sell it in a few years and walk away.” “I am just not ready yet.” Or perhaps you know someone who has given one of these answers when discussing their potential exit from the business and retirement? Like starting an exercise program, exit planning can easily wait until tomorrow. However, for the Baby Boomers, tomorrow is here. Business owners born between 1945 and 1964 make up 25% of the population but own over 60% of the small businesses. The high ownership levels result from their surge into the job market in the 1970s and the lack of room in corporate America to absorb a much larger and better-educated employee population. From 1975 until the mid-1980s, Baby Boomers opened new businesses at a rate never seen before and not duplicated since. Today, over 5,000,000 Baby Boomers are preparing for retirement. Just as when they all went to college, started new businesses, and became prolific consumers, they will create a flood of small business sales in the United States. So, what is exit planning, and why should you do it? Also, how do you do it, and when should you start? Exit Planning: What is it and Why do it? When a business broker creates an “exit plan,” it usually involves listing the business for sale to a third party. An attorney’s planning focuses on the legal documents that allow the transition of a company’s assets to new ownership. An accountant or financial planner will look closely at tax and inheritance issues, and an insurance broker offers products that reduce the risk of interruption or disaster. It is logical then that exit planning is quickly becoming a significant focus of the legal and financial communities. Although boomers are healthier than prior generations, they all have to retire eventually. Tens of thousands of professional advisors are positioning themselves to provide tax, risk management, wealth management, and contract preparation services to this flood of sellers. You may be in your 40s and 50s and maybe thinking that this doesn’t apply to you. After all, you have plenty of time. However, the answer to that question is another question: then why buy life insurance? Anything can happen to any of us at any time. Exit planning is another form of insurance— just as you are making sure your family is being cared for, don’t you want the same for your business and employees? There are many additional benefits to starting exit planning early— the process of getting your business transition ready means making it more attractive to investors. That includes, but is not limited to: maximizing revenue, lowering expenses, increasing efficiencies, eliminating owner-centric processes, getting the business modernized, up-to-speed, and more profitable. All of these will have tremendous benefits for you and your company regardless of your exit timing. Examining the strengths and weaknesses of the business, IT systems, management team, and customer base are good continual improvement practices that make the company more profitable in the short-term and make it much more attractive for a potential buyer. How to Plan Your Exit? A successful transition starts by determining the planned date of exit and the post-tax proceeds required from the business to satisfy the owner. The target proceeds should be achievable in the chosen time frame. If they are not, you can extend the time frame or reduce the financial goal. After determining schedules and financial information, there are essentially three options on whom will take over as an owner: a family member, an internal team sale, or a third-party sale. Discussions with accountants, attorneys, financial planners, and others likely feel similar to a complicated maze that makes you not even want to start the process. A trained advisor will help initiate the process and will engage in constant communication with all of the parties listed above, with your control of the process remaining intact. The most effective and efficient approach to exit planning is to select a single professional who can manage all the others involved. Creating new entities or sale agreements is pointless unless the tax implications are first understood. Planning to reduce the impact of income taxes may be rendered moot if a company is not in a position to sell. Putting the company up for sale may be a disaster if an owner doesn’t understand what buyers are looking for and how much they’re willing to pay. Not only will this process determine the best options for your eventual exit from your business, but it also provides a screenshot of the company. It helps to identify areas of the organization that can be improved and what we can outsource to others to achieve the highest sale value possible. Eventually, the planning also leads to a smooth transition, operationally, so that your business continues to be run in the best manner possible by new leadership. When to Start? Retiring Boomers will outnumber GenXers reaching ownership age by 4,000 a day! Studies show that the generation reaching retirement age is 2.5 times more likely to want to own a business than those in their 30’s and 40’s. Thus, this severely limits the small-business buyers in our economy today. It often takes a minimum of 5 years to develop most succession and exit plans—a more realistic number might be as much as ten years. Time and potential buyers will likely be the two most significant challenges for you in this process. Once you have a plan in place, you can implement it whenever you chose. Why wait until it is too late? Get the conversation started with the correct parties now. Are you ready? The single largest transaction and transition of your life deserves special attention. Are you planning to exit