David Tobin is the Founder and Managing Partner of TobinLeff, an M&A advisory and exit planning consulting firm.
If you ask a group of business owners for a show of hands of who thinks an exit plan is important, everyone’s hand will go up. But if you ask the same group what an exit plan is, almost everyone will look at you with a blank stare. Most owners do not know. So, what is an exit plan, and why will having one usually increase your net worth when it’s time for your exit payday?
What Is An Exit Plan?
An exit plan is a blueprint of how you will convert business value into personal wealth—how you will move to the next chapter of your life with peace of mind, knowing there is a plan to transfer ownership on your terms and timetable. Here are some of the strategic questions a well-thought-out plan should address:
• What are the goals, desires and intentions of the stakeholders?
• What is the valuation of the company today and what can it be worth when it’s time to sell?
• What can be done to enhance the value of the company and prepare for a smooth transition?
• What are the viable exit pathways: sell to a strategic buyer/financial buyer/management team/family members; form an ESOP; retain control and institute incentives for others to run the company, etc.
• Are you open to deal structures that provide the opportunity for “two bites at the apple” (two liquidity events) or do you want to divest completely?
• What can be done to reduce income and estate taxes?
• What’s your “number” (the amount of money you need to do the deal)? Will that amount help you lead your desired lifestyle?
The process to develop the plan is more important than the end product. When done properly, the planning process will help you answer the above questions, expand your view of possibilities, craft a viable game plan and increase your net worth. Setting an exit plan into action typically involves four phases. Here are many of the elements of each phase.
For most business owners, when to sell and who to sell to are significant decisions. Transferring ownership of a closely held business may affect many people, including family members, employees, suppliers and the local community. The exit planning process should continuously clarify the stakeholders’ goals, desires and intentions. It should crystallize the owner’s vison for the business, their desired involvement during the transition and the leadership of the company moving forward.
2. Assessment And Planning
To help owners make decisions, the exit planning process must involve assessing the business and its opportunities. The current market valuation for the business should be estimated for different types of transactions and buyers. The selling price for a sale to a strategic buyer may differ from the price for a financial buyer. If selling to employees or family members is an option, the valuation may be different compared to selling to a third party because synergistic savings and cross-selling opportunities may not exist with an internal transfer.
The company’s value drivers should be evaluated to highlight the strengths and opportunities and identify potential weaknesses and threats that will inevitably come up during the selling and due diligence processes. Examples of value drivers include the company’s unique selling proposition, client concentration risk, profit margins, experience of the senior management team and growth.
Different exit pathways should be evaluated. Maybe the company is large enough to warrant a potential investment from a private equity group or family office that would provide the opportunity for two liquidity events. Maybe forming an ESOP trust fits best with the owner’s desires. Or perhaps retaining control and instituting incentives for others to run the company is the best option for a few years. There may be many potential ways to monetize business interests.
During the development phase, the timeframe and benchmarks of the plan are outlined. These plans should be implemented while the business and opportunities are being assessed but finished after, since the choice of which exit pathway to pursue, and the estimated selling price, will influence the members on the advisory team. If the likely pathway is a sale to a third party, then the services of an investment banker or broker are needed. If the transition will be to family members, then the services of a family business coach may be needed. The advisory team will most likely include a business planning or transaction attorney, a CPA and the owner’s financial planner.
The size of the transaction may warrant coordinating the exit plan with the owner’s estate plan. Furthermore, business continuity plans should be reviewed or developed in relation to the exit plan to help safeguard against unforeseen events such as the death or disability of a stakeholder. Determine a Plan B such as bringing on an investor, forming an ESOP or retaining control, to approach the primary exit pathway from a position of strength.
The objectives and timeframe influence implementation of the plan. Many exit plans can span years if value enhancement strategies need to be applied and/or successors groomed. Because the advisory team may include multiple players, especially if the exit plan integrates with an estate plan or financial plan, it’s important for someone to be the “quarterback” to develop action plans and assign responsibilities and due dates. The team should meet with the stakeholders periodically to clarify or refine the objectives and keep the plan on track.
Developing and putting into action an exit plan sounds like a lot of work, and it can be. However, you only get to sell each company you own once, so developing a plan is essential to get you more money for your investment and hard work. The planning process should be fun and energizing while providing you with peace of mind.