By Edward L. Fixen
It’s very interesting that most business owners do not hesitate to buy and invest in insurance to protect their personal and business assets, yet don’t make the nominal investment in an exit plan that protects a business owner’s greatest asset, the value of their business when it comes time to retire and sell. Not only does an exit plan serve to increase and protect the value of your business, it should provide a significant increase in the net amount of money you realize when selling your business. In the most simple of terms, exit planning helps a business owner get a higher price and keep more proceeds when it comes time to sale or transfer the business.
I do understand that planning and preparing for the successful sale of a business is made very difficult by the day-to-day demands of running a successful business. Perhaps that is why it has been reported that less than 28% of privately held businesses are estimated to have a business exit plan, despite the reality that exiting your business is a certain outcome for every business owner.
What Is An Exit Plan? An exit plan is a long-term strategic plan that establishes goals and objectives addressing business, personal, financial, legal and tax related issues involved in the ultimate sale of a business. A well executed exit plan will enable an owner to:
- Control how & when to exit the business
- Have contingencies for illness, burnout, divorce and even death
- Allow continuity of the business in the event of a planned or unplanned exit
- Minimize and/or defer capital gains taxes
- Achieve financial & personal goals after exiting the business
- Maximize company value in good times and bad
How To Get Started. The first step of an exit plan should be to identify the value of the company today, keeping in mind that a good business valuation doesn’t just provide an estimate of the current value but also identifies those factors such as key financial value drivers, financial benchmarks, depth of management, customer concentration, and other non-financial factors that add or detract from the potential value. The valuation analysis can then be used as a tool by the owner and appropriate advisors to focus on increasing the value and sellability of the business by addressing weaknesses related to financial, operational, organizational, legal and other issues. This information will also enable a business owner and a financial advisor to determine if the current value will meet personal/family financial needs after the sale of the business or not. If not, the opportunities for value improvement identified in the valuation analysis should be pursued.
Depending on the size of your business and the complexities of your business and personal investments, the next step might involve retaining a business advisor/coach to help guide and help coordinate the development of the exit plan, including the coordination of a multi-disciplinary team of one or more professionals consisting of financial advisor, CPA, estate attorney, business attorney and banker to fully develop and implement the exit plan.
What Is The Value Of An Exit Plan? Given enough time to work, an exit plan should help significantly increase the sale price, reduce capital gains taxes and as a result significantly increase the net proceeds that you have to invest after the sale. Case studies cited by the Exit Planning Institute have shown a return of 100% plus on the investment required to develop an exit plan. Depending on the value of the business, a good exit plan can translate into savings up to several hundred thousand dollars or more even after exit plan costs. More importantly, it will help you achieve your personal goals after the sale of the business.
When Should You Get Started? It is only natural not to think about selling your business until you are ready to retire or move on to a new challenge in life. However, since it takes 6 to 12 months on average to complete the sale of a business once you have completed the 2 to 4 month pre-sale business valuation/preparation and you may be expected to have a continued involvement in the business for some transition period after the sale, you should begin the exit planning and preparation process at least three to five years before you actually want to exit the business.
Author: Mr. Fixen is a Certified Business Appraiser (CBA) and Certified Business Broker (CBB). Mr. Fixen is the President of BusinessQuest, a business valuation and M&A brokerage firm serving small & mid-size, privately-held businesses throughout Southern California and can be reached at (909) 636-9827 or www.BusinessQuestInc.com.