Five Reasons Why Exit Planning Makes Sense

According to a Price Waterhouse Coopers survey, 75% of business owners report that they regretted selling their business. Some thought they had left money on the table or that their timing was off. Others said they did not understand their options and/or did not hire the right advisors. All owners said that if they could sell their business again, they would be better prepared.

So why aren’t most business owners adequately prepared for the biggest deal of their life – selling or transferring their business? They cite that they:

  • Are bogged down with the day-to-day running of their business.
  • Find it hard to change their mindset from growing a business to harvesting its value.
  • Do not understand the value of an exit plan or what is entailed.

Does this sound like you? 

If you own a business, you should have an exit plan.

Venture firms would never invest in a private company without having a clearly defined exit strategy and neither should you.

If you do not have an exit plan already, then make sure you have one in place at least one, and preferably three years prior to when you think you will exit your business. It takes that long to devise and execute on a good plan.

What is an exit plan?

“An exit plan is a comprehensive road map that addresses all of the business, personal, legal and tax issues involved in selling a privately owned business.” It is a systematic, goal-focused and planned approach to leaving a business in which you are an owner.

A good exit plan will answer the following questions as well as provide an action plan to get to the desired end-game.

  • How much is my business worth?
  • What can I do to increase its value and salability?
  • How much do I need to retire?
  • Which exit strategy is most appropriate?
  • How much will I net after taxes and fees?
  • What can I do to increase what I net?

5 good reasons to have an exit plan.

The ultimate objective of an exit plan is to increase the likelihood that the owner’s departure from the business will achieve his or her personal and business goals. Without it, the owner may not know what to expect, much less what is possible.

Here are 5 good reasons why every business owner should have a well-conceived exit plan:

1. Increases likelihood of achieving business and personal goals

One of the most important outcomes of an exit plan is that it articulates and aligns both business and personal goals and objectives.

The classic example are the business owners who want to cash-out and transfer the business to their cash-strapped child who needs the owner to finance the purchase. These are two contradictory goals. Wouldn’t it be best to resolve these issues before you are too far down the path of a transfer?

2. Maximizes the value of the business

As part of the process, you will want to have your business valued. This will establish a baseline valuation and an estimate of proceeds if you were to sell today.

Comparing this to your personal financial needs defines the gap in valuation needed to meet your goals. With enough time and a well-conceived plan, you can increase the value of your business, thus increasing your potential net proceeds.

3. Gives you control of how and when you exit.

Once your business is well-prepared for sale, you can proactively execute an exit strategy. Simply, the more prepared you and your business are, the more attractive your business will be in the marketplace and the more options will be available to you.

You certainly don’t want to reactively sell an ill-prepared business under sub-optimal conditions, such as burn-out or health-related issues. .

4. Reduces uncertainty for your family and employees

Is the future of your business the proverbial elephant in the room? Perhaps one of your employees wants to buy you out, but you haven’t talked specifics with him. Or, your spouse wants to move closer to the grandkids – yet there is no time horizon as to when that might happen.

Employee retention and familial stress can be mitigated once the plans and intention for you and your business are well defined and communicated.

5. Minimizes taxes

What matters most is the net cash proceeds to you. So, not only do you want to maximize the value of your business, but you also want to minimize both personal and business taxes.

You need a comprehensive tax strategy which will minimize capital gains tax, possibly defer tax payments and ensure the lowest possible tax rate. This cannot happen overnight, but will require proactive planning with a tax specialist.

by Kelly Deis of Soundpoint Consulting
©2014, Soundpoint Consulting, LLC

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