Exit Planning

There are a wide variety of ways an owner can exit a business.  Sale of the entire business to an outside party is just one option, and not necessarily the most common. 

Exit planning options include:

• Sale of the business to an outside entity, either known or unknown to the owner
• Sale or gift to family member(s)
• Sale to another shareholder/partner/member
• Solicitation of a new minority or majority investor/partner
• Merger with or acquisition of a competitor, supplier, or customer, or other company with complimentary products and services
• Recruitment and/or development of personnel and systems to replace the owner in part or in full
• Current management buyout or outside manager buy-in
• Creation of an Employee Stock Ownership Plan (ESOP)
• Franchising or licensing
• Managed close down/ liquidation
• Walk away
• Bankruptcy
• Forced to continue the business due to lack of other options.

Failure to plan
Obviously the last four options above are not particularly desirable.  But more than half of all businesses end in one of those final ways.  Failure to develop an adequate (or any) exit plan, well in advance of the exit, is a primary driver of business closures.  Every month in our offices we see at least a few businesses that have lost more than half their value in the last 1-3 years through no or poor exit planning.  Every year we see literally hundreds of business owners that would very much like to retire but cannot afford to because they have not created enough transferable value in their business.

Business event risks
Anyone of the following events can cause a significant loss in business value, unless a comprehensive exit plan is prepared will in advance of the event, and actions taken to mitigate the risks.

• Owner health crisis or limitations
• Death of owner/shareholder/partner/member
• Other reasons owner is suddenly take from business, such as a move off island due to spouse relocation or family illness
• Shareholder/partner/member dispute on any number of topics, including when or whether to sell, compensation, roles and responsibilities, whether to reinvest or distribute profits, etc.
• Shareholder/partner/member quits or competes against the business
• Family member quits the business or proves incapable of managing it
• Owner burnout, leading to decline in business performance
• Loss of lease or escalation of rents
• Loss of key customer, supplier or personnel
• Lack of capital to make required upgrades, remodeling, equipment purchases, etc.
• Emergence of a dramatically better business opportunity that makes the current business no longer worth pursuing.

Owner objectives
One of the first steps in managing for the above risks, evaluating the exit options and developing an exit plan, is to clearly define the owner’s objectives.  The right exit option depends on a variety of factors specific to each business and its owner(s).  A critical input are the owner’s objectives in the following six areas:

Exit plan inputs
In addition to the above objectives, other inputs to the exit planning process include:

• “Gap analysis”, a detailed assessment of where the business and owner are today vs. the defined objectives
• Business appraisal
• Assessment of business strategic position, including a detailed assessment of Strengths, Weaknesses, Opportunities and Threats (“SWOT” analysis)
• Assessment of business operations and systems
• Financial review and benchmarking vs. comparable companies
• Growth and value improvement opportunities
• Evaluation of leadership & management capabilities of owners and key managers
• Business dependency on owner and obstacles to removing
• Owner health issues
• Tax and estate planning issues
• Current retirement savings, asset allocation, passive income and other wealth planning issues
• Assessment of owner risk tolerance

Plan components
Our comprehensive exit plan actually is actually a series of plans that addresses at least the following critical issues:

• Overall exit plan, including prioritization of exit options
• Business value enhancement plan (including organic and acquisition growth options)
• Overall financial and retirement plan
• Estate, trust, and tax plan
• Business continuity plan and agreements (e.g., buy/sell agreement, key man insurance, non compete agreements)
• Staff recruiting, development and succession plan
• Business sale or transition plan

Collaborative process
Plan is not developed in isolation, but rather collaboratively with a wide variety of professionals.  The specific parties involved vary greatly from business to business, depending on the size and complexity of the business, the nature and extent of the owner’s assets, number of shareholders/members/partners and family members in the business, etc.  Some of the parties that may be involved in the process:

• Owner/shareholders/partners/members
• Spouses, children and other family members
• Wealth advisors
• CPA
• Attorneys (general, trust and estate, tax)
• Key executives
• Business and/or real estate appraisers
• Business consultants
• Industrial psychologist.

The time required to develop a comprehensive exit plan is roughly 3-6 months, depending on the size, complexity and ownership structure of the business. Contact us for a complimentary consultation.

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