The Importance of Exit Planning
One of the most critical decisions you will make as a business owner is determining when and how you will transition away from the company you built. But exit planning is about so much more than selling a business; it’s an exercise in fortitude. You must be able to release the reins you’ve held for years (or decades) and place your trust in others. This transition will try your finances and emotions unless you plan and enlist the help of trusted advisors with experience in the exit planning process. With preparation, exiting your business can be seamless and can set you up on your next adventure.
Building an Exit Strategy
Exit strategies can begin as early as Day 1 when businesses are first formed. How you form your business and the procedures you establish early on can set you up for success. We like to think of an exit strategy as having three distinct phases:
- Goal Setting
- Building Value
Let’s walk through these phases together.
Know what you want. Do you want to make a clean break? Do you want the business to pass to someone you trust? Do you want to hang up your leadership hat but stay financially invested? These goals are essential for you to determine early on and to revisit regularly. Your team of advisors can set you on the path, but to get where you want to go can take years – so start early.
Let’s look at a common exit goal: to pass your business to one of your children. Here are just a few of the questions you and your team will need to answer:
- How will my child acquire my ownership interest? Will it be purchased, financed, gifted, transitioned using an ESOP?
- What financial consequences will we have from the transaction (gift taxes, income taxes, financing interest, administrative fees, employee turnover, etc.)?
- Is my child interested in running my business?
- Is my child trained and competent to run the business?
- How will my employees and my co-owners feel about the transition?
- How will our business be valued? Is that value where I’d like it to be?
- Is there a way for me to counsel and support my child even after I’m gone?
- Will other family members be upset when my child takes over the business?
Answering these questions will help you uncover what’s most essential and which targets are even attainable. Your goals may change over time, and that’s ok. If you discuss your thoughts with your financial advisors, they can adjust your business strategies to support those changes.
Once you’ve defined your ideal exit strategy, you will have a better idea of how to build value for your business. If you plan to sell the company to the highest bidder, boosting market value at any cost may be sensible. But if you want to preserve the business for the next generation, you may instead seek slow but consistent growth. Building value includes improvements in the following areas:
- A stable and motivated management team
- Operating systems that improve cash flow
- A solid, diversified customer base
- A realistic growth strategy
- Effective financial controls
- Stable and improving cash flow
When it’s time to take that leap of faith, reach out to your trusted advisors for step-by-step guidance. Transitions can be tricky, and they may need to be completed on specific schedules to reduce your tax burden or improve your successor’s ownership interest. In general, inside transitions take longer than outside sales, even if your successor is primed to take over. There is no set timeline that you can expect your transition to take. Some can take as little as 90 days, but others can take several years. It’s important to view the execution period as a process rather than an event. Here are just a few things you will need to do during the execution phase:
- Perform a business valuation
- Update your business plan
- Transition key tasks
- Discuss your exit with your employees
- Get approval from your co-owners
- Legally transfer assets and business licenses (if needed)
- Establish financing and sales documents (if needed)
- Employ the help of attorneys, bankers, CPAs, wealth advisors, appraisers, and consultants
Exiting your business will require you to face difficult truths, let go, plan, keep focused, and trust others. If you want to discuss your succession plan, Klatzkin can help. For additional information, call us at 609-890-9189 or click here to contact us. We look forward to speaking with you soon.