A Graceful Exit
Plan Ahead for a Smooth Ownership Transition
Richard H. Tanner, CFP
January 17, 2012
For a small business owner, the New Year is a great opportunity to take stock—not only of the past year and your present business prospects, but also of the future. As you look forward, can you leave your business in style?
Is your exit plan complete so you can leave your business when you want, how you want and to whomever you want?
Too many times, business owners are—quite understandably—so busy working in the business that they put off the need to work on their business. A majority of closely held and family-owned businesses will change hands within the next five years. Very few of them will be prepared for a smooth transition.
That sobering truth is why an exit plan is so critical. It’s a blueprint to help promote a smooth transfer of the business under all circumstances. One never knows what tomorrow may bring. Taking the time to think about a cohesive exit plan now can eliminate crucial risks. Your employees, your clients—in fact, your overall business—may be vulnerable without a plan in place.
An exit plan increases the odds that you can leave the business under your terms. Most business owners spend a lifetime building a business yet seldom take the time to develop a successful exit strategy. Setting consistent and achievable objectives early in the exit-planning process is critical.
For example, the three principal objectives common to nearly all business owners are
1. Leaving the business on their timetable. How much longer do you want to remain active in the business?
2. Leaving the business financially stable. How much after-tax income will you need from your business to live the lifestyle you desire?
3. Transferring the business to whom they desire. How will you transfer the business to an outside party, a key management group, co-owners, a family member or to all employees?
Let’s say you've determined you only want to remain in the business for five more years, and you’ve decided to transfer the business to your son, who is a key employee. Establishing clear exit objectives relative to this strategy is vital.
For example: How much after-tax money do you want or need? Where is your son going to get the capital to buy you out? What is the business worth? Will payments be dependent on his ability to manage the business successfully in the future? Answers to these and other questions are vital in securing financial independence while exiting your business.
Food for Thought
To evaluate your current exit plan, take this business owner self evaluation. The questions may seem misleadingly simple, but to answer them affirmatively requires thought and action on your part.
1. Do you know your retirement goals and what it will take after taxes to achieve them?
2. Do you know how much your business is worth today, in cash?
3. Do you know the most suitable exit strategy from your type of business (sale to an outside party, family member, management group or all employees)?
4. Do you know how to prepare your business for sale to an outside third party in order to obtain maximum value?
5. Do you know how to transfer your business to family members, co-owners, or employees while lowering taxes and potentially enjoying financial gain?
6. Do you have a business continuity plan that helps protect your business and the financial independence of your family if the unexpected happens to you?
7. Do you have a written exit plan that communicates clearly your desires to all key people involved?
8. Do you have consistency in your exit plan and estate planning documents?
Plan for the Worst
Business owners should always address the risks of business continuity in their exit plan. Premature death or disability can financially cripple the business and family members. Your instructions should cover three important issues.
1. Has the next management team been selected and do they have the capability of successfully running the business? (Owners should name names.)
2. What professional advisors should be consulted with in the ownership transfer process? (Again, be specific.)
3. What advance preparations and funding have been made to execute the preferred exit strategy?
Many owners understandably lack exit-planning experience. We suggest you begin your exit-planning process by working with experienced advisors that specialize in exit planning. Professional advisors have the experience, tools and extensive knowledge necessary to help you with each step of the process.
Don’t put it off. Take the time to develop a comprehensive exit plan today! Implementing an exit plan can help protect the business value, preserve financial independence and provide assurance to business owners.
Richard Tanner is a registered representative of and offers securities and investment advisory services through MML Investors Services, Inc., Member SIPC. Supervisory Office: 6340 South 300 East Suite 500 Salt Lake City, UT, 84121, 801-943-6277.