By Don Reichert
Chairman Emeritus at CDA Group, LLC
If you’re a typical business owner, you probably have intentions of getting out of business someday. Over the years you’ve likely taken a good idea, a little bit of capital, and a lot of hard work and turned it into a thriving enterprise that has served you and your family well and hopefully positioned yourself to retire comfortably at some point.
According to the Business Enterprise Institute (BEI), there are more than 20 million businesses in the United States. Of those, 79 percent of business owners have said they want to retire within the next 10 years. Yet only 15 percent of those have talked with an advisor about their plans. Who knows if the percentages are precise, but here’s one that is absolutely right on the money: 100 percent of those business owners will get out of business someday.
When business owners start to think about exiting their companies, the number of possible exit paths may seem limitless, but BEI lists only eight:
- Transfer the company to (a) family member(s)
- Sell the business to one or more key employees
- Sell to employees using an employee stock ownership plan (ESOP)
- Sell to one or more co-owners
- Sell to an outside third party
- Engage in an initial public offering (IPO)
- Retain ownership and become a passive owner
Unfortunately, too many business owners find themselves working a rolling five-year business plan. The owner has tentative plans to get out within five years, but challenges of business and personal life continuously put off plans into the future. Before they know it, 10 or 15 years have raced by and they are right back where they started with all good intentions but no real progress towards transferring and/or monetizing their business.
In order to feel comfortable that there is a definitive business exit plan in hand, a business owner should be able to definitively answer the following three questions:
When do you want to go - specifically, be out of the business on a day-to-day basis?
To whom do you want to sell it - family member, key employee, outside third party?
What do you want or need (in terms of dollars) from the sale of your business?
If you cannot answer these three questions with clarity, I suggest you do not have an exit plan. It’s important to remember that none of these answers have to be set in stone. It’s likely that one or more of the goals and parameters will change. But planning takes time. The farther in advance you start planning for your exit, the more options you have and the better the outcome is likely to be. According to BEI, a solid business exit plan should incorporate seven distinct steps:
- Step One: Set exit objectives/goals
- Step Two: Quantify available resources
- Step Three: Focus on business value
- Step Four: Sell to a third party
- Step Five: Transfer to insiders (co-owners, family members, or key employees)
- Step Six: Develop a contingency plan for the business
- Step Seven: Develop a contingency plan for the owner’s family
In developing a plan using these steps, the business owner should utilize a team approach incorporating the help of collateral professionals such as a business exit planner, tax attorney, CPA, financial planner, and in some cases the use of an investment banker or business broker. A good exit planner should be capable of coordinating the services of these other professionals in a holistic approach in order to evaluate all the options, execute the plan, and optimize the final results.
One of the most critical considerations is to make sure that there is no gap between what the business owner needs for a comfortable retirement and what the business can produce in terms of net proceeds after taxes are addressed. Remember, in the end it’s all about cash flow. As a general rule, that’s what drives the value of what buyers are willing to pay and what the business owner ultimately needs for a comfortable retirement and/or successful estate plan.
All of this planning may sound complex and time-consuming, but it doesn’t have to be. Armed with a written exit plan, a team of skilled and experienced advisors, and (ideally) several years before you exit, you can optimize your ability to leave your business in style.