Why It's Crucial to PLAN your Exit
The strategy behind of any type of proper planning is to visualize an endpoint, anticipate the actions needed to get there, and mitigate risk along the way. An exit plan accomplishes the exact same objective. However, as you may have seen in the results of one of our industry surveys, 90% of all business owners have not initiated the exit planning process. Unfortunately, most clients come to us when they are ready to sell their company and without having done any advance planning. When a comprehensive exit plan has been implemented and validated by your various business, tax, accounting, and personal advisors, you are likely to have increased shareholder value, improved the chances of a sale, reduced your future tax burden, and increased the wealth to pass on to subsequent generations.
Every entrepreneur is told that they should create an exit plan at the same time they create their business plan. However, most people think that an exit plan only encompasses when and to whom they want to transfer their business and don't actually go through the planning process. As skilled and as successful as most business owners are, they cannot, working alone, create and execute their exit plans. Even your attorney, CPA or financial and insurance representative, individually, is usually unable to craft a successful exit plan. Successful exit planning is a multi-disciplinary effort that requires you and your advisors working together. For your exit plan to succeed, you need your legal, financial, tax, and investment banker input. In addition, having an exit planning professional on your team should help you lower the costs incurred by these professionals and assist in keeping your exit plan on the right track.
Whether your endpoint is a sale to a third party, a transfer to family member, an orderly liquidation, or something in between, each outcome will have a separate set of actions needed. For instance, if you are selling to a third-party, your end objective should be to maximize value. Alternatively, if you wish to transfer to family, you would want to minimize the transfer value.
You will also have to address as part of this planning process, what would happen to the business and to your family in the event your death or disability preceded your planned exit.
Below are the most common objectives of a thorough exit plan:
- Minimize taxes now and/or following the transfer of the business
- Minimize estate taxes when you transfer your wealth/business to family
- Determine how to meet your retirement goals
- Prevent business value from crashing upon your death or disability
- Communicate your goals and expectations with your family and keep them on the same page, supportive, and cohesive
- Build value within the company to maximize eventual sale price and terms
- Improve chances of sale because of certain features implemented
- Understanding the value of your business
- Determine who would be the best type of buyer (family, third party, employees, management, partner, etc.)
Once you have finished your comprehensive exit plan, it is important to implement it otherwise that plan is only an expensive piece of paper. Save your money on getting a plan done if you have no intention of implementing it. Just like your business plan, your exit plan will probably change along the way and it is important to adjust it accordingly. However, that isn't an excuse to avoid the planning process.
If you are interested in learning more, feel free to contact us.