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By Edward L. Fixen
It’s very interesting that most business owners do not hesitate to invest in insurance to protect their personal and business assets, yet don’t make the nominal investment to develop an exit/succession plan that protects a business owner’s greatest asset, the value of their business when it comes time to sell or transfer to a successor. The value of a profitable, going concern will be worth far more than the sum of the underlying tangible assets. So without a good exit/succession plan, your business is vastly under-insured.
Not only does an exit/succession plan serve to help 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 maximize sale price and minimize tax liability on the future sale or transfer of a business, whether that sale or transfer is planned or unplanned (such as in the case of the untimely passing of a business owner).
What Is An Exit Plan?
An exit plan is really the final chapter of a well written business plan. A business plan provides a strategic plan for achieving various operating, organizational and financial goals during the life of the business. An exit plan identifies in great detail, the steps an owner of a business should take to achieve personal financial goals when it comes time to exit and sale or transfer the business to a successor. An exit plan addresses business, personal, financial, legal and tax related issues involved in the sale of a business. A well executed exit plan will enable an owner to:
Have contingencies for partnership disputes, disability, burnout, divorce and even death
Allow continuity of the business under planned and unplanned circumstances
Minimize, defer or eliminate capital gains taxes
Achieve financial & personal goals for retirement and/or your family
Maximize company value at the time of sale or transfer whether during good or bad economic times
How To Get Started
The first step of an exit plan should be to develop a benchmark fair market valuation and operational/organizational assessment of your business today. This initial valuation and business assessment will provide the basis of your company’s market value today and identify strategic steps from a financial, operational, management and organizational perspective to improve the value of your company to get to your retirement goal. The benefit of this first step is that not only are you identifying ways to improve the value of your business and developing the foundation for an exit/succession plan, you are also getting a professional business analysis which is very beneficial if for no reason other than to increase income and cash flow regardless of when you sell or transfer the business.
Depending on the size and complexities of your business and personal investments, the next steps would involve some level of working with a multi-disciplinary team of one or more professionals consisting of business coach, financial advisor, CPA/accountant, estate planner/attorney and business attorney to develop a comprehensive exit/succession plan.
What Is The Value Of An Exit/Succession Plan?
Given enough time to work, an exit/succession plan should help reduce capital gains taxes, increase the sale price and as a result significantly increase the net proceeds that you have to invest or retire with 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 after professional advisor plan costs.
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 pre-sale business valuation/preparation and you may be expected to have a continued involvement in the business for some interim time period after the sale, you should begin the exit planning and preparation process at least three to five years before you actually want to sell to a third party or transfer the business to a successor.
Regardless of if or when you plan to sale or transfer your business, now is the perfect time to start planning your exit/succession strategy.
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 California. Ed can be reached at (909) 636-9827 or [email protected].
