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EXIT PLANNING

Developing an exit plan is the most important thing you can do to protect the value of your business.

Your business is very likely your most valuable asset (often 80-90 % of your net worth and 100% of your annual income), so why do so many business owners fail to exit their business and realize this value successfully? Why are there so many excuses to avoid the subject?

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DON’T BE A STATISTIC

The Exit Planning Institute (USA) estimates that 76% of business owners will transition in the next 10 years and 48% in the next five years.

 

  • Only two out of 10 business that goes to market will close.

 

  • Of the 20% of business that sells, 50% do so with significant concessions from the seller.

 

  • Only 30% of businesses transition successfully to the second generation; only 12% to the third and 3% percent to generations beyond.

 

Business owners fail to transition their companies because they fail to plan successfully, they underestimate what it means to prepare for an exit, and they wait too long to start the process.

WHAT IS AN EXIT PLAN?

An exit plan is a comprehensive road map that addresses all of the business, personal, financial, legal and tax issues involved in selling a privately owned business. A good exit plan includes contingencies for illness, burnout, divorce, and even your death.

 

The plan’s purpose is to: maximize the value of the business at the time of exit, minimize taxes, provide continuity to your employees, customers and vendors, ensure the owner can accomplish all his or her personal and financial goals, and preserve wealth for your family.

 

Exit planning “combines the plan, concept, effort and process into a clear, simple strategy to build a business that is transferable through strong human, structural, customer and social capital,” according to the Exit Planning Institute. The future of you, your family and your business are addressed by exit planning through creating value today.

Without a predetermined exit plan, you will probably:

 

  • Undervalue your company and leave hard earned wealth on the table,

  • Pay too much in taxes, and

  • Lose control over the process by being reactive, rather than proactive.

 

On the other hand, a well designed and implemented exit plan enables you to:

 

  • Control how and when you exit,

  • Maximize company value in good times and bad,

  • Minimize or eliminate capital gains taxes,

  • Ensure you achieve your business and personal goals,

  • Have strategic options from which to choose, and

  • Reduce uncertainty for your family and employees.

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EXIT PLANNING STRATEGY

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SIX ESSENTIAL COMPONENTS

To be effective, your exit plan must include these six essential components:

 

  • It should include a concise statement of your business goals, personal goals, and family/estate goals. This step is essential to ensure that all of the goals are consistent and set the direction for the rest of the analysis.

  • An exit plan should contain a detailed business valuation to establish a baseline value for the business.

  • The plan should help you identify specific ways to enhance the value of the business prior to your exit.

  • A good plan should contain an analysis of the pros and cons of your different exit alternatives such as a third-party sale, management buyout, family succession, or liquidation.

  • A good plan should provide suggestions to minimize any capital gains, ordinary income, and estate taxes related to the exit.

  • The analysis should contain an action plan that details the specific personal and business steps you must take in order to prepare for your exit.

WHEN IS THE RIGHT TIME TO START?

Nearly every business owner asks this question. You should ask this well in advance of an exit. In fact, in an ideal situation, the principles of exit planning are fully integrated into a company’s overall strategy. It is never too late to start planning for succession, to begin planning for your exit, or to start applying the strategic principles of exit planning.

Most owners do not realize that they should have a three-to-seven-year horizon to exit their business.

TEAM OF ADVISORS

No single professional advisor has all of the expertise needed to design a comprehensive, integrated exit plan. The best exit plans incorporate input from a team of advisors that includes:

 

  • A business attorney with M&A experience,

 

  • A financial advisor or wealth management professional who does planning work,

 

  • A tax specialist who is versed in the latest tax issues,

 

  • An insurance professional, and

 

  • An investment banking firm that specializes in exit planning.

 

Sticking to your exit plan is just as important as having one. You should meet with your advisors on a regular basis to ensure that crucial steps are being completed on schedule, bearing in mind that the cost of developing a good exit plan is usually insignificant compared to the additional value received at the time of sale. After all, exiting your business is probably going to be the most important deal of your life time.