Don't Forget To Plan Your Exit
By Bill Black, The Exit Coach
It’s indisputable that someday you will be exiting your business, and hopefully it will be on your own terms. However, most small business owners would rather focus on growth than on the exit strategy, and that neglect can be disastrous for you and your loved ones if you find your business is not as valuable or easy to transfer as you thought. So, while you are planning and executing the growth of your business, don’t forget to make time on a regular basis to plan your eventual exit.
Bill Black is an Orange County, Calif.-based Certified Exit Planner who started as a financial planner 30 years ago. He began specializing in exit planning with his firm Exit & Retirement Strategies, Inc. 20 years ago as he saw the “writing on the wall” that the Baby Boomer generation was heading toward retirement age in alarming numbers. Black started The Exit Coach Radio Show, where he has interviewed more the 1,000 business advisors on the topic.
Exit planning should start three to five years before you plan to sell. Why that time frame? Many components of an exit plan take that long to put together.
Creating an Exit Plan
A written exit plan has three parts: facts, goals and strategies. The idea is to have a focused planning document that all of your advisor team members can reference to give you their best advice based on the situation at hand. For example, some strategies may not make much sense until an advisor understands that the goal is a successful exit in the next three to five years.
The facts section has the information any advisor would need to know about your business structure, shareholders, valuation, key employees and benefits, outlook of the business, etc.
The goals section is a written outline of your specific exit goals – including timelines, how much you need to get from the transaction and your preferred transfer targets – so there can be no dispute among your team of advisors.
The strategies section contains a list of all of the anticipated strategies that will need to be implemented. Strategies cover several disciplines, including tax-reduction, legal, financial and operations. Once the strategies are listed, the team is called together for a consensus meeting.
Consensus – The Heart of Exit Planning
At a consensus meeting, all advisors should be given a copy of the facts, goals and strategies, then work together to agree, edit or add to the strategies listed. They will prioritize the sequence of the exit planning strategies. Since a typical exit plan has 10 to 20 strategies, it is imperative that they be prioritized and implemented in a certain order, lest the business owner will go broke and crazy at the same time!
Components of Exit Planning
Besides being categorized by planning disciplines, strategies can also be broken into five key planning areas:
1. Building business value
2. Business continuity
3. Transferring to inside buyers
4. Selling to outside buyers
5. Protecting your estate and family
A big part of exit planning is making your business more valuable and easier to sell. This includes knowing your “value drivers” and implementing strategies to grow the value of your business.
Business Continuity – Leave a Note
What if the business needs to be sold because you die or become too sick or injured to work? How will your family know what your wishes are if you're unable with communicate to them? Business continuity instructions contain your instructions as well as leads for the family should they need to sell to an outside buyer.
If business owners want to sell to their key employee, a buy-sell agreement between the employee and the owner that is funded by life and disability insurance on the owner can be invaluable.
Selling to Insiders – Getting Blood from a Turnip
Planning for lifetime transfers can be a little bit trickier. Retaining key employees is one important and often-overlooked area that can maximize the chances your business will run without you. Agreements with employees to entice them to work harder for some form of deferred compensation (often tied to the increasing value of the business) are popular. The accrued balance can be a source of capital for the employee to make a down payment on the business in the future.
Tax Efficiency – A Must for Insider Transactions
If you plan on selling to inside buyers like employees or family members, having a properly structured salary continuation plan in place prior to the owner’s retirement date can save a tremendous amount of Social Security taxes. These plans pay ongoing cash to owners as an executive benefit and reduce the overall cost of an internal buyout.
Many buyouts are a structured note between the buyer and the seller, and are tax-inefficient as the employee gets a taxable bonus then pays the seller for the stock purchase, which is also subject to capital gains tax.
Outside Sales – Making a Mountain of a Mole Hill
When planning to sell to an outside buyer it's important to have established great books, records and processes. Small businesses are valued as a multiple of their EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). That means you need to show a profit before you sell. Be prepared to demonstrate that the business is well run and profitable with audited financials and other proof that the business won’t be a nightmare for the buyer.
While it’s true that CPAs and business buyers can “re-cast” financials to figure out the true net profits of a business, most business buyers don't have much patience for (or confidence in) businesses that have sloppy books and records, no marketing plan and few processes and systems, including detailed job and task descriptions.
Asset Protection – A Moat and a Drawbridge
Once an owner sells their business, they have cash that can be attacked easily if not protected by asset protection planning. This type of planning puts a moat and a drawbridge around your cash assets to make it harder for predators and creditors to attack you when you are sitting on a pile of cash or liquid assets.
Estate Planning – Avoiding Taxes and Confusion
Estate planning is for more than just the wealthy. It's for people with children they want to protect by minimizing state taxes and other problems in time delays. A small amount of time can yield big dividends, especially if your business sells for a boatload of money.
Exit Planning can be complex, but it is extremely important to your business. Why work on increasing value all of your life only to lose it at the point of exit? The sooner you start devoting time to exit planning, the easier it will be to get out someday.
Bill Black, "The Exit Coach," is a certified exit planner endorsed by the Business Enterprise Institute and the Exit Planning Institute. On his Internet-based Exit Coach Radio show, accessed by more than 40,000 listeners each month, Black has interviewed 1,000 professional advisors from disciplines such as law, accounting, insurance and banking for their best tips, ideas and precautions for business owners. Black also hosts the Exit Coach Radio show on the LA Angels radio station, KLAA 830AM Los Angeles, with two shows, airing Sundays at 10 a.m. and 6 p.m. Black has authored several books, including "Business Continuity: Five Steps To Protect Your Family," now available as afree download at http://exitcoachradio.com/5steps. Black speaks regularly to business and professional groups, in addition tokeynotes and workshops at regional and national association meetings. For more information visit www.exitcoachradio.com and follow Black on Twitter.