Whether you plan for it or not, you will eventually exit your business. But like most owners, you must concern yourself with running your business today. As busy as you are, I encourage you to take a few minutes to see how a well-planned exit can have a very positive impact on your current business.

When building a business with the end in mind, it’s not enough to just grow revenues or make more money each year. How you get there becomes as important as the results, because exit planning holds your business up to a brighter light. It forces you to consider not only what you and the business need today, but also what is needed in the future. Taking action to meet those needs creates a potentially better business today.

Assume that we are speaking with an owner who wants to sell his business for the maximum value to a third party. He is pleased to announce that revenues are up 25 percent over prior year. The buyer is likely to say “Great, how did you do this?”

The owner’s answer will impact how much the buyer is willing to pay for the business. Assume the answer is something along these lines: “Well, most of the clients know me and have worked with me for a long time. Over the last few years I have really focused on sales, so revenues are up.”

Hearing this answer, that buyer is probably reducing in his head the price he is willing to pay. Contrast the first hypothetical answer with this “fine-tuned” second: “Well, our business development team—headed up by our bright, young VP of Sales—has really established a competitive edge in core markets. Several years of effort are just starting to take off.”

This second answer is probably increasing the business’s price with every passing minute. In both answers, sales were up 25 percent. Yet the revenue increases were accomplished quite differently. In the first answer, results were tied to the owner’s efforts. If that owner exited the business, or just got tired of going on sales calls, it appears much of that revenue could be lost. The second answer unquestionably reveals a better business. That business will grow without its owner going on sales calls and has established competitive advantages that a buyer can build upon.

For more information on this  strategy and other examples register for the next upcoming complimentary webinar.

Consider another example. Assume for a moment we are speaking with an owner who desires to sell the business to one or more top employees. Most business owners recognize the need to motivate and retain top talent. However, if an owner intends to sell his business to employees, motivating and retaining them becomes far more important.

Let’s give two hypothetical explanations for how this owner might approach this issue. The first is: “My top people are truly loyal to me. They trust that I will take care of them and treat them fairly. As for motivating them, I pay cash bonuses based on how well I feel everybody did.”

Contrast the first hypothetical answer with this approach: “While I have great relationships with my top employees, I feel that it is not enough in today’s competitive marketplace. Several years ago we developed a phantom stock program that ties their rewards to key business results. If the employees quit, they forfeit the phantom stock. If they stay and buy my business, the phantom stock is convertible to cash to help fund a future purchase of the business from me.”

Both approaches could work. But in the first approach, motivation and retention is based on personal loyalty. How cohesive and effective will that management team be once the current owner is gone? The second approach clearly creates a better business today, has less risk of key employees leaving early, and compensation is tied to measurable performance. Under the second approach, the owner also has begun to address the difficult issue of how the employees are going to afford his buyout.

We identify seven steps that you need to take today in an earlier blog “Steps That Will Nearly Always Maximize Value at Business Sale”.

So what does an exit plan look like, and why would it add value? By now, you may be convinced that you need an exit plan and should get started on it right away. So, what exactly is an exit plan? According to our research, nine out of ten owners stated they do not have a current, written exit plan. Most owners need guidance on what a sound plan looks like.

A thorough and sound exit plan needs to address six (6) areas. If a plan fails to consider any one of these areas, it could not only miss an issue but possibly cause more harm than good.

1) TAX

• The plan should be as tax efficient as possible in converting your business ownership into personal wealth.

2) LEGAL

• The plan should use sound legal tactics and instruments to protect you and your business.

3) FINANCIAL

• An exit plan accurately models how you achieve your post-exit financial goals, most importantly financial freedom.

4) OPERATIONAL

• The exit plan should support the business’s current and future operational needs in areas such as management, financial stability, and reinvestment.

5) FAMILIAL

• The plan should help to maintain family harmony and achieve family goals.

6) EMOTIONAL

• An exit plan should address whatever else may be important to your peace of mind in post-exit life.

Your plan should be reviewed by your trusted advisors, most importantly your accountant(s), attorney(ies), and financial advisor(s). Exit planning is a multi-disciplinary effort. In this NAVIX Case Study, we demonstrate how an experienced exit planning team can add value by saving the business owner a million dollars twice with proper exit planning implementations.

Call 772-210-4499  or email Tim to find out more about exit planning solutions.

Ask about our complimentary proprietary tools and checklists. All inquiries are confidential.

About 70% of the six million privately held businesses in the United States have more than one owner, and the average number of owners per business is nearly three. Practically all of them want to successfully exit from their businesses one day, and most of them will find that their path to exiting successfully requires aligning their exit plans with those of their co-owners. This is where the challenge begins.

 
The connection between being a business co-owner and the need for co-owners to create alignment at exit can be understood by imagining a chain with three links upon which a sentence is printed. This conceptual tool that is created for NAVIX Consultants from working with hundreds of business owners, is called the Three-Link Chain.

The first link says:

Business owners cannot achieve their major goals without a successful exit.

Business owners usually share a similar set of desired outcomes for their exit. These most commonly include reaching financial security, having the freedom to do what you want to do, and creating a sustainable business legacy. For most owners, all of these desired outcomes are only realized with a successful business exit. To reach financial freedom, most owners need to unlock the majority of their wealth which is tied up in their business and its supporting assets. To have the freedom to do what you want to do, most owners need to turn the business over to new ownership and leadership. To create a sustainable business legacy, most owners need to successfully exit and demonstrate that the business cannot only survive without them, but actually thrive.

The second link in the chain says:

Business co-owners cannot successfully exit if their goals are incompatible with one another.

When a business has two or more co-owners, some or all of the co-owners cannot successfully exit if their individual goals are incompatible with one another. It is common that one owner’s goals will hinder, disrupt, or outright block one or more of the other owners’ goals. There are many ways this can occur. For example, one co-owner may want to sell the business to an outside buyer, whereas another co-owner wants to pass the business down to family. In other examples, the co-owners could have different exit time frames, or vastly different dollar amounts they want at exit, or conflicting beliefs on who should lead the business going forward. Sometimes the co-owners have goals which are only mildly conflicting. Sometimes the co-owners’ goals appear to be completely irreconcilable.

The third link in the chain says:

Goal compatibility can only be achieved with a conscious and ongoing effort to create co-owner alignment.

Goal incompatibility rarely goes away on its own. If anything, waiting makes matters worse because with less time, co-owners will have fewer solutions. Therefore, co-owners must proactively work to create and maintain an aligned approach to exit planning, working together collaboratively to implement strategies and tactics that enable every involved owner to successfully exit.

The Three-Link Chain illustrates the connection between business owners needing to successfully exit one day, and business co-owners needing to work together to make this happen.

Finding co-owner alignment is one part of the exit planning process. Planning for and achieving a successful exit involves a range of financial, tax, legal, and business challenges. Also, most business owners will exit only once and consequently lack experience planning for exit. Therefore, owners and co-owners stand to greatly benefit from engaging a team of advisors knowledgeable and accomplished in this field. The essential advisors are an exit planner, accountant, and attorney. Depending on the co-owners’ exit strategy and time horizon, additional advisors may include a mergers and acquisitions (M&A) professional, commercial banker, financial planner, and business appraiser.

Call 772-210-4499  or email Tim to find out more about exit planning solutions.

Ask about our complimentary proprietary tools and checklists. All inquiries are confidential.

Much of the conventional wisdom suggests you should start serious planning no earlier than five years before you are ready to exit. This misperception is so common; we call it the Five Years’ Fallacy. This approach gets owners in more trouble than perhaps any other mistake.

There are four major flaws with this approach:

1. Selecting the ideal business entity is an important consideration, especially in the event of a sale, because the type of business entity may greatly impact taxes.

For example, owners of C corporations in some cases may reduce taxes upon a sale by converting to S corporation status prior to sale. However, the tax benefits can be lost if the company is subsequently sold within a ten-year holding period after conversion. In another example, the reverse may be true—owners of S corporations seeking to implement an ESOP as an exit strategy may secure tax-free proceeds from the sale if they convert to a regular C corporation. Matching up your exit plan with the appropriate business entity may require years to implement.

• Owners seeking to pass a business down to the next family generation often desire to make tax-free gifts of business interests to the successor generation. Congress limits the value of gifts that can be made without triggering gift or estate taxes, including annual gift limits. As a result, passing down a large family business can take many years to accomplish. Too little time inhibits the effectiveness of gifts and other family-business transfer strategies.
• If you intend to sell to a third-party buyer, your business’s intellectual property may be an important factor in driving value at US law sets timelines required to register, file, and protect your intellectual property. If you wait until five years or less to develop an intellectual property strategy, likely you will have forfeited many of the rights and opportunities available to grow value.
• Owners seeking to sell their business to one or more employees need to hire, train, and groom a key employee or entire team prepared to run your business after your departure.Developing successor leadership may take many years.
• Many exit tactics benefit from the “miracle of compound growth” on invested assets. For example, funding an income tax deductible retirement plan creates potential future income outside the business. If you have only a few years to implement this tactic, your results likely will be greatly diminished.

2. Waiting until the last five years to prepare for exit, reduces your control over many factors that influence the business’s sale price.

Road market conditions, interest rates, capital markets, your industry’s health, and other external forces influence the availability of cash, the cost of capital, and the demand for businesses in your industry or market. Many economists note that these cycles can take as long as seven to ten years to complete. If you are restricted to exiting within a specific time frame such as five years, you may choose a time when your business’s price is lower due to external conditions. Your investment advisor probably has been telling you, “Don’t try to time the market,” when investing in publicly traded stocks, bonds, and mutual funds. But when it comes to selling your business, you must try to time the market. Leaving only a few years’ preparation to sell, may limit the ability to achieve the most favorable external climate.

3. Limiting your exit planning preparations to the last five years is you simply cannot predict the future.

A prospective buyer with a large checkbook may walk through your front door tomorrow. Your industry may go through an unexpected consolidation (often called a “rollup”) which heats up your potential market price, but only for a window of time. You may become seriously disabled and unable to work. You may die. Who guarantees how much time you have? Life happens.

4. The fourth and final reason why you cannot wait to start serious exit planning is that if you have not clearly defined where you want to end up, then you do not know if the decisions you are making today will get you there.

In Stephen Covey’s best-selling book, The 7 Habits of Highly Effective People, the second habit is to “Begin with the End in Mind.” His lesson applies here. To paraphrase Mr. Covey, the successful owner must be able to visualize the desired outcome and concentrate on activities which help achieve success in the end.

Align your business growth plan with your business exit plan. Every day you are making decisions that in some small or big way will impact your success at exit. Making today’s important business decisions without considering the ultimate impact on your exit, causes great difficulties down the road.

The Five Years’ Fallacy: Exit Planning Facts vs Fiction

Call 772-210-4499  or email Tim to find out more about exit planning solutions.

Ask about our complimentary proprietary tools and checklists. All inquiries are confidential.