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Five Steps To Planning A Successful Business Exit
By John M. Leonetti
A owner’s exit is a once-in-a-lifetime transformation. We’re not talking about selling a house or a car. This is a complex process that requires the technical expertise of a team of trusted advisors. The key to any successful exit is planning. It must begin with personal reflection on the part of the owner regarding what he or she wants out of the exit. Only then can the owner, along with his advisors, design an appropriate exit strategy. The five (5) planning steps outlined in this article are designed to help owners define their personal goals, understand all the transfer options and work with an advisory team to execute a successful exit plan.
Step 1: Define the Personal Goals of the Owner
Since personal goals intertwine so closely with the daily existence of a private owner, it only makes sense to begin with the basic albeit crucial question, “What do I want to accomplish with my exit?” The answer seems obvious--make the most money after taxes and fees. Often, however, it isn’t this simple. Owners have nourished and raised their businesses from infancy; they typically care a lot about who will take the reigns. Family members might also be involved in the business. Their fate will also be dependent upon what the owner ultimately decides.
Aside from money, other motives for a exit can include “transfers to family”, “transfers to employees”, “transfers to co-owners”, “partial transfers to gain some liquidity today but still run the company’s day-to-day business”, or “an initial public offering”. The decision often comes down to a question of liquidity. A substantial source of liquidity outside the makes for a much easier choice.
However, more often than not an owner’s wealth is tied up in the business. The owner must therefore balance his financial and interpersonal goals in order to find the best possible exit strategy. Therefore, an assessment of the range of values for the is the crucial next step.
Step 2: Understand that a Range of Values Exist for the Business
The value of a privately-held depends largely upon who buys it. It’s not as simple as watching the ticker tape for today’s stock price. The type of buyer can impact both the price placed on the shares (or assets) of the and the tax consequences to the selling owner. Value (net transfer price) is therefore a “range concept”.
“Internal” transfers to employees, family, and co-owners provide fewer dollars up front, but allow for greater “control” of the business, “continued income”, and flexible timing and tax characterization of payments to the exiting owner. By contrast, “External” transfers to other industry players, financial groups, or by initial public offering command more liquidity “up front” while the owner relinquishes more control over the Company and the timing and tax characterization of payments. A closer examination of the transfer options can help an exiting owner determine the right balance of money and control over the future of the business.
Step 3: Examine the Options Available for the Transfer of Shares
There are seven (7) primary purchasers of privately-held stock (or assets). Below are listed the Parties to the Transaction and Types of Transactions Available (samples; not a complete list)
Employees - Employee Stock Ownership Plan (ESOP)
Charity - Charitable Remainder Trust
Family - Gifting Program
Co-owners - Leveraged Buyout
Financial Groups - Recapitalization
Industry Buyers - Acquisition (at Synergy Value)
Initial Public Offerings - IPO (at Public Market Value)
Based on the primary goals defined in step one (1), an exiting owner chooses the “party” to whom the will be transferred. That designee, once chosen, will determine the limits or expansion of the Value. At the end of this phase, the process comes full circle as the Value (after taxes and fees) is matched against the owner’s goals. If the two meet as one, congratulations! A successful exit strategy has been devised. Now it’s time to execute.
Step 4: Provide Full Financial Disclosure to the Buyer
This step isn’t going to be easy on the owner. Assembling financial records and presenting them to a buyer/successor is a very time consuming, very personal survey of how the is run. It can be huge psychological block for many exiting owners. Remember, any savvy buyer (or successor) to a will need to understand the financial condition of the Company. When an owner fesses up to any “creative accounting” they may have employed over the years to help build wealth and reduce tax bills, the process goes smoother. Full disclosure is the best path to a seamless process. There is an old saying - “if the truth will kill a deal, then there is no deal”.
Not only that, but it may reward the owner in the end. Full disclosure is not about passing judgment, but instead affords the buyer (or successor) an opportunity to assess the business’s true profit potential. The astute exiting owner will recognize this in advance. Why? Because most “creative accounting” practices depress the profitability of a business. Clear those away and the Buyer will recognize a higher earning power and in turn a higher Value for the Company.
Step 5: Assembling the Advisory Team – No One Should Go It Alone
Planning and executing a successful exit strategy is a complex process that requires the technical expertise of a team of trusted advisors. It’s not the time to take short cuts or pinch pennies. Time and money should be invested in assembling the right team of advisors; a successful exit is more than worth it. It should be viewed as an investment in success.
We must understand that owners are independent “self-starters”. If they weren’t, their businesses wouldn’t be so successful and we wouldn’t be talking to them. But some of their strengths and characteristics can lead many owners to attempt the “do-it-yourself” exit strategy. This can create an unnecessary drain of time and money on both the owner and their business.
A owner’s exit is a once-in-a-lifetime transformation. It is an important milestone that is sure to provide any owner with one of the most challenging yet satisfying sense of accomplishments.
So remember, planning is the key to any successful exit because a proactive approach to an Exit Strategy is the only approach to a successful Exit Strategy. If you’ve come to the end of this discussion, you’re already ahead of the game.
© John M. Leonetti
Specializing in Business Exit Strategies, John M. Leonetti, Esq., M.S. Finance, CM&AA founded Pinnacle Equity Solutions to provide exit strategy planning services to business owners as well as education and training programs for professionsal advisors. To learn more about John's Exit Strategy Services and his recently published book, "Exiting Your Business, Protecting Your Wealth", visit ExitingYourBusiness.com