Broker Check

Business Succession

Exiting a business while also ensuring the succession of management and control is a process, not an event. There comes a point in the lifecycle of any business when the owner no longer wants to, or is able to manage the firm. Since the timing of retirement, death or a disability is difficult to predict, it’s prudent to have a succession or transfer plan in place now to protect the value of your business, safeguard your personal financial well-being, and provide your business with leadership during a transition period.

However, as the old saying goes, “we don’t know what we don’t know”. Whatever vague or preconceived ideas we may have of how and when we might exit our business, the fact remains that there are many different options, exit paths and potential values that should be explored in order to determine the most optimal exit strategy. We often find that what the business owner wants to do is in fact, not compatible with the actual situation.

An exit strategy is not the same as the sale of a business. Since there are a number of potential methods for exiting a business, it all begins with knowing the options available to you. Regardless of the path you take, you will want to free yourself from the business, but also protect your valued employees as well as your business and personal wealth.

Owners can establish the strategy that best meets their goals and protects their wealth once they follow the steps needed to determine the course they should set with their planning. Let’s look at how you can protect your wealth by understanding the exit planning process in order to build and execute a customized exit strategy plan:

  1. Establish Exit Goals - Measure Your Financial & Mental Readiness
    • Are you financially prepared for an exit from your business? If your personal wealth outside the business is not enough to take care of you in retirement, how can you retire? This is called the “Value Gap”. This situation is fairly common and leads to developing a plan to “monetize” your business value for your own financial security. The sooner you identify your value gap, the easier it will be to find and execute solutions to plugging the value gap.
    • Are you mentally prepared for an exit from your business? Being mentally prepared to leave your business may be the largest challenge that you face. If you are not mentally ready today to depart, it does not mean you should put off planning for your exit – in fact, just the opposite is true. Far too often business owners procrastinate planning because “I’m not ready”. By the time they are ready, frequently one or more potential exit paths have closed – a missed opportunity. The mental shift that needs to take place is learning to look at the business from the investment perspective in the market place, rather than the perspective of a job with perks – and this takes time, education and attention.
  2. Identify the Type Exiting Owner You Most Resemble – 4 Types of Exiting Owners
    • Get-me-out-right-away-at-the-highest-price exiting owner. This owner will be mentally ready, but not financially prepared.
    • Well-off-but-choose-to-work exiting owner. This owner will be financially secure personally, but still enjoys working in the day-to-day business environment.
    • Stay-and-grow-the-business exiting owner. This owner will not yet have achieved financial independence and still enjoys working and building the business. Statistics indicate that as many as 80% of business owners fall into this category.
    • Rich-and-ready-to-go exiting owner. This owner will have achieved personal financial independence and is ready to move on to other things in his/her life.
  3. Learn Your Exit Option & Understand the Value of the Option You Choose
    • Internal Exit Paths – Family Transfer, Management Buy-Out, Employee Stock Ownership Plan (ESOP).
    • External Exit Path – Private Equity Group Recap, Outright Sale.
    • Valuation – each exit path creates differing potential business values for a transfer. Taxation upon these transactions also can differ significantly, so understanding and balancing your value need with the exit path values on an after-tax basis is critical in choosing the optimal option for you.
  4. Execute Your Exit Strategy Plan to Achieve Your Goals and Protect Your Wealth
    • Business owners value privacy and often adopt a do-it-yourself philosophy which can extend to the business exit process. They might know a little about the technical & related aspects of a business transfer, including accounting, taxation, estate planning, insurance, legal documentation and financial advisory services. But knowing a little bit about something can be dangerous; it can lead to a false sense of control and confidence, as well as indefinite procrastination. Why go it alone?
    • When you consider how much wealth is at stake, it makes much more sense to create a professional advisory team, with an exit specialist managing the planning process. A good team consists of a number of players, each contributing to the overall execution of the exit strategy. Typically, some of the following would be included:
      • Attorney
      • Accountant
      • Financial Planner
      • Insurance Agent
      • M & A Broker
      • Valuation Specialist

As stated previously, exit planning is a process, not an event. Obtaining the right information, in a timely manner to make the best decisions with regard to your exit strategy, takes time. Remember the Six P’s, and by becoming engaged in the planning process early, with a business exit planning specialist to partner with you throughout the process, you will be able to exit your business on your terms – when you want, transferred to whom you want, while protecting your own financial independence.

Authored by- Mel Bannon (Sagemark Consulting Private Wealth Services Member)