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The Need for Exit Planning

04.13.2020

Every business has a cycle, and so does every business owner. Some owners start from the ground up, while others either purchase or inherit their company; regardless of where you started, the path is always filled with peaks and valleys, all culminating at a finish line. The goal with exit planning is to turn this finish line into a checkpoint, like the transfer of the baton in a relay race or touching of the wall just before another swimmer dives in. Succession is simply a fact of life; it is unavoidable – some will plan while others will ignore.

Your business is very likely your most valuable asset (often 80-90 percent of your net worth and 100 percent of your annual income), so why do so many business owners fail to exit their business and realize this value successfully? Why are there so many excuses to avoid the subject?

  • “I will deal with it when I’m ready to sell.”
  • “I’m too busy to focus on this right. We’re putting out fires, which takes all my time.”
  • “I don’t need to plan. I get letters all the time from potential buyers so that selling will be easy.”
  • “I’m not ready, so planning isn’t necessary.”

Don’t be a statistic

The Exit Planning Institute estimates that 76 percent of business owners will transition in the next 10 years and 48 percent in the next five years. Now for the bitter reality of successful exits:

  • Only two out of 10 business that goes to market will close.
  • Of the 20 percent of business that sells, 50 percent do so with significant concessions from the seller.
  • Only 30 percent of businesses transition successfully to the second generation; only 12 percent to the third and 3 percent to generations beyond.

The lack of success has nothing to do with intelligence, performance, or desire. Business owners fail to transition their companies because they fail to plan successfully, they underestimate what it means to prepare for an exit, and they wait too long to start the process.

  • Two-thirds of owners do not know all of their exit options.
  • 78 percent have no formal internal or external transition team; 83 percent have no written transition plan; 49 percent have done no planning at all.
  • 93 percent have no formal retirement plan or a clear idea of the next “chapter.”
  • 40 percent have no contingency plan in the event of death, disability, divorce or forced exit.
  • 56 percent of businesses believe they have a good idea of their business’ worth; only 18 percent have a formal valuation.
  • Twelve months after selling, 3 out of 4 business owners “profoundly regretted” the decision to sell.

The purpose of exit planning is to change the outcome; to avoid becoming another failed succession. The good news is the result is in your hands because you can plan. By planning your succession, giving it the proper attention within your organization, and doing so at least two years in advance, you have considerable control over the outcome.

What is an exit plan?

An exit plan outlines all the business, personal and financial issues involved in transitioning a company. It includes contingencies for illness, burnout, divorce and death. The plan’s purpose is to maximize the value of the business at the time of exit, minimize taxes and ensure the owner can accomplish all his or her personal and financial goals in the process.

Exit planning “combines the plan, concept, effort and process into a clear, simple strategy to build a business that is transferable through strong human, structural, customer and social capital,” according to the Exit Planning Institute. The future of you, your family and your business are addressed by exit planning through creating value today.

When is the right time to start?

Nearly every business owner asks this question. You should ask this well in advance of an exit. In fact, in an ideal situation, the principles of exit planning are fully integrated into a company’s overall strategy. It is never too late to start planning for succession, to begin planning for your exit, or to start applying the strategic principles of exit planning.

When you’re ready to start, the first step is a call to your advisor – two advisors, to be exact. The exit planning advisor – if you don’t have an exit planning advisor, I would suggest seeking out colleagues who may have sold their business or utilizing the resources of the Exit Planning Institute (EPI) or Business Exit Institute (BEI). The wealth advisor – if you don’t have one, seek out a referral or search for a Certified Financial Planner (CFP). The exit planning advisor and wealth advisor will work in conjunction to determine your personal, financial and business goals – the output is your exit plan.

To determine how to develop your exit planning strategy, contact David Killion, Transaction Advisory and Litigation Support Services Principal, at dkillion@bswllc.com or 314.983.1304.

Team

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