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5 Steps to Planning a Successful Business Exit

5 Steps to Planning a Successful Business Exit

A business 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 business exit is planning. It must begin with personal reflection on the part of the owner regarding what he or she wants out of the business 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 business owners define their personal goals, understand all the transfer options and work with an advisory team to execute a successful business exit plan.

Step 1: Define the Personal Goals of the Owner

Since personal goals intertwine so closely with the daily existence of a private business owner, it only makes sense to begin with the basic albeit crucial question, "What do I want to accomplish with my business 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 business owner ultimately decides.

Aside from money, other motives for a business 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 business 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 business is the crucial next step.

Step 2: Understand that a Range of Values Exist for the Business

The value of a privately-held business 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 business 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 business 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 business 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 business stock (or assets). Below are listed the Parties to the Transaction and Types of Transactions Available (samples; not a complete list)

Internal Parties:

  • Employees - Employee Stock Ownership Plan (ESOP)
  • Charity - Charitable Remainder Trust
  • Family - Gifting Program
  • Co-owners - Leveraged Buyout

External Parties:

  • 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 business owner chooses the "party" to whom the business 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 business 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 business owner. Assembling financial records and presenting them to a buyer/successor is a very time consuming, very personal survey of how the business is run. It can be huge psychological block for many exiting owners. Remember, any savvy buyer (or successor) to a business 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 business 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 business 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 business exit is more than worth it. It should be viewed as an investment in success.

We must understand that business 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 business owners to attempt the "do-it-yourself" business exit strategy. This can create an unnecessary drain of time and money on both the business owner and their business.

A business owner's exit is a once-in-a-lifetime transformation. It is an important milestone that is sure to provide any business owner with one of the most challenging yet satisfying sense of accomplishments.

So remember, planning is the key to any successful business 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 advisors with the tools they need to incorporate Business Exit Planning into their advisory practices. To learn more about John's Exit Strategy Services and to receive a FREE copy of his special report, "How To Incorporate Exit Strategies Into Your Advisory Practice", visit Pinnacle Equity Solutions

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