At some point in time in time every business owner will “exit” their business. In most cases, a small business represents a significant component of family wealth and the owner will be keenly interested in maximizing this value when the business is either sold to an outside 3rd party or key employee, or transferred through an orderly succession to a family member.
Unfortunately, most entrepreneurs are so immersed in the daily demands imposed in operating their company that they have neglected to properly plan for the inevitable transition of their business. The goal of this article is to briefly review the exit/succession planning process and highlight the importance that these plans have for every business owner. Whether the goal is to exit the business in six months or ten years, it is critical that a business owner recognize that succession planning is the single most important way to take control of the terms and conditions of exiting their business. Proper exit planning will reduce the variability of the business control transfer, and can secure a sound financial future for their family.
WHAT IS EXIT PLANNING?
Exit Planning, also commonly referred to as “business succession planning,” is a methodology that addresses three critical questions a business owner will face at some point in time:
1. What is the timetable the owner seeks to exit the business?
2. Who will succeed the owner when the business is transitioned or sold?
3. How much income is needed from the business transition/sale for retirement?
The Exit Plan becomes a written roadmap that is developed in conjunction with legal, accounting, and financial professionals and is designed to maximize the value an owner receives when exiting the business. Exit planning can be a fairly complex long-term process and take many years to properly implement. The process can be broken down into succinct action items and deliverables and should illustrate how value can be received at a very early stage. A professional team will bring efficiency to the process by implementing a basic structure of steps to be followed, and can insure that the experience will be a personally gratifying and financially rewarding endeavor for the owner.
The key steps involved in developing an Exit Plan include:
1. Establishing Exit Objectives
• Determining the retirement timetable, long term income needs, and financial requirements necessary to reach them.
2. Identify the key drivers of business value
• What is the fair market value of the business if it were sold today?
3. Plan to build & preserve business value and reduce risks
• Activities that can be implemented to leverage best practices and maximize the business value.
4. Transfer of ownership, management, & control