At some point in time in their careers, all business owners must ask themselves an important question: “Am I ready to make an exit?”
Exit planning is a strategic process that business owners should have in place long before they are ready to exit. The plan should encompass business, financial and personal planning. To have a successful exit plan, businesses need to have a successful exit strategy. This includes maximizing transferrable business value, ensuring the owner is financially prepared and establish a plan for what is next.
The Importance of Exit Planning
Establishing an exit plan is not only about the financial aspects of the business but also about ensuring the business’ legacy, its employees and the owner’s future. According to the Exit Planning Institute’s State of Owner Readiness Survey, published in 2021, 60% of owners strongly agreed that having an exit strategy was “important to their future and the future of their business.” However, in the same report nearly 80% of owners had no written transition plan and 50% had not even begun planning. The main objective of an exit plan is for business owners to be able to shape the future of their business on their own terms. This involves assessing, planning, developing and implementing an exit plan.
Benefits of Having an Exit Plan
Having an exit plan gives the business owner peace of mind that a plan is in place for when they are ready to leave and transfer ownership. This allows the following to then take place for the business owner:
- Controlling when and how you exit the business
- Maximizing company value through the ebbs and flows
- Minimizing or eliminating capital gain taxes
- Ensuring business and personal goals are achieved
- Having strategic options to choose from
- Reducing the uncertainly for family and employees
If a business owner does not have an exit plan in place, they might be undervaluing their company and lose control over the process by being reactive instead of proactive.
Essential Components to Consider for Exit Planning
A successful exit plan involves careful consideration of several key factors. Here are a few essential components to keep in mind when planning:
- Preparation: The owner should create a vision for the business, their desired involvement during the transition and the leadership of the business moving forward. Stakeholders should also clarify their goals, desires and intentions with the business as well.
- Legacy Preservation: Creating an action plan that details the specific personal and business steps a business owner must take to prepare for their exit can aid in the transition. Most business owners have spent years building their business, and exit planning can help preserve the legacy of the owner, ensuring their vision for the company continues after they leave.
- Assessment of Business Value: Understanding the true value for the business is essential for exit planning. Some business owners may want to identify ways to enhance the value of the business prior to their exit. A detailed business valuation can help determine a baseline value for the business. Business valuations involve a thorough assessment of assets, liabilities, revenue stream and growth prospects.
- Financial Planning: Exit planning helps businesses secure their financial future by identifying the most tax-efficient strategies. These strategies could be suggestions to minimize any capital gains, ordinary income and estate taxes related to the exit.
- Exit Strategy: There are various exit strategies to consider including selling to a third party, management buyout, employee stock ownership plan (ESOP), family succession or liquidation. Each option has its own set of advantages and challenges, and creating an analysis of the pros and cons of the different exit alternatives can be beneficial for final decision making.
Developing and implementing an exit plan can seem daunting at first, but it is worth the effort to plan ahead for the investment of the business’ long-term success. Preparing for an exit in advance ensures that the business can transition seamlessly, minimize disruptions to operations and safeguard employees and customers.
If you have any questions regarding exit planning, contact our Family-Owned & Closely Held Business Practice!
About the Author
Ryan Hastings, CPA, CVA, CEPA, Principal at Brown Schultz Sheridan & Fritz. Ryan is an essential member of the BSSF Family-Owned and Closely Held Business Practice. Since becoming a Certified Valuation Analyst (CVA) in 2004, Ryan has conducted numerous valuations of closely held businesses across many different industries. Additionally, as a Certified Exit Planning Advisor (CEPA), Ryan helps his family-owned and closely held business clients with transition strategies, succession and exit planning, business valuations, strategic planning and more.