There are many tools available to help individuals get into business, but few that help them get out. The Exit Planning Process is a customized comprehensive approach to designing and implementing a business owner’s successful exit from his or her business. Exit Planning uses an owner’s unique personal objectives to convert his or her current reality into the desired outcome. The Exit Planning Process helps maximize the financial return, minimize tax liability, plan for contingencies and increase the likelihood of a successful transfer of the business.
Active business owners seldom slow down. We all know that the only things likely to reduce your pace are death or terminal burn-out. This is not to imply that you are not well intentioned; quite the contrary. You are so well intentioned that you’ve taken on more tasks than you can possibly complete.
Indecision: The WRONG Decision
“I haven’t decided what I ultimately want to do with my business, or when I want to exit, or how much money I’ll need, or whom to sell to, so how can I plan my exit? Besides, I don’t want to exit right now.” If you’ve said this, or thought it, you are not alone. Many business owners are either overwhelmed with the thought of exiting or are so busy fighting daily business fires that they think they cannot plan their exits.
Meet Today's Challenges and Exploit Today's Opportunities
Over the past few months we have shared with you a number of ideas about how you and your company can approach both the challenges and the opportunities that this economy has thrown at all of us. We’ve discussed specific issues such as fraud, and more general issues such as preserving value, focusing on cash flow, increasing revenue and keeping all actions consistent with your ultimate goal: leaving your company when you want, to the successor you choose, for the amount of cash you want or need.
Time is Essential in the Transfer to Insiders
In this series of articles about transfer to insiders, we identified a number of elements that are part of the well-designed transfer to insiders. The first element we identified was the qualifier: Time.
Elements of a Plan to Sell to Insiders
In the previous issue of this newsletter, we compared the attributes of sales to third parties to those of transfers to insiders. We looked at the often-overlooked risk involved in third party sales and the equally overlooked benefit of owner control and payoff in insider transfers.
STEP 1
STEP 2
Owner Objectives
Business and Personal Financial Resources
Each business owner’s unique objectives drive the creation of his or her Exit Plan. Step One articulates and tests owner objectives so that the comprehensive Exit Plan focuses on achieving those goals. Key exit objectives that will be identified as part of the Exit Planning Process include: (1) the owner’s desired departure date, (2) the value that the owner wants or needs from the business, and (3) the individuals or entities to whom the owner wants to sell/transfer the business.
Step Two determines what owners have – how much the business is worth and how much cash flow the business can generate for Exit Planning. The current value and projected cash flow, along with other non-business assets and income, are used to determine the paths and planning tools available to reach the owner’s objectives.
STEP 3
STEP 4
The elements that build the value of a business or protect the value the owner has worked so hard to create are called Value Drivers. In Step Three, owners and their advisors identify which Value Drivers are important to meeting the owner’s overall exit objectives and devise specific steps to maximize the impact of the Value Drivers.
During Step Four, owners who want to sell their business to a third party will work with their advisors to identify ways to do so in the manner that results in the most beneficial sale price and terms. Not all business owners go through Step Four – those who don’t either retain their ownership long-term or skip to Step Five.
STEP 5
Step Five includes a detailed plan to transfer the business to insiders (children, key employees or co-owners). Careful planning in Step Five allows the owner both to receive the desired value from the business and minimize risk, while using the resources of the business should the purchaser have little or no personal capital.
STEP 6
Step Six prepares the owner for the contingencies that affect the business and its owners. A complete Exit Plan incorporates potential changes, such as death or permanent disability of an owner so that the owner’s objectives can still be achieved if circumstances change.
STEP 7
The sale of a business generates cash for owners, their families and the IRS. During Step Seven, owners and their advisors create a plan that not only preserves wealth, but minimizes taxes using both lifetime and estate planning tools.
