Advisors understand that business owners are so busy addressing today's economic competitive challenges that they don't feel they have time for the critical task of Exit Planning. We also understand that, at some point:
- All business owners exit their businesses
- When that date arrives, business owners want to exit on their terms and conditions.
As advisors, we also know that successful exits don't just magically happen. Designing a comprehensive Exit Plan - based on an owner's unique exit objectives and flexible enough to adapt to changing economic, business and personal circumstances - can be the difference between liquidating your company and selling/transferring it for millions of dollars.
Let's look at the characteristics of a good Exit Plan in light of a common fact pattern.
Exit Planning Characteristics
Several years ago, I met with Jim and Tim McCoy, the owners of a thriving construction company. What I assumed would be a business planning meeting turned into a "We-are-getting-out-of-business-so-how-do-we-do-it?" meeting. As successful as they were, the McCoys were tired of navigating the labyrinth of government regulation and of paying ever-increasing taxes. Ultimately, the day-to-day grind of running a multi-million dollar company had taken its toll.
For the McCoys, a sale to a third party was not feasible not only because neither brother was willing to remain with the company after a sale but also because they had failed to develop a strong management team. Few savvy buyers will purchase a company without a great management team committed to remain after the sale.
Transferring ownership to one or more key employees was also out of the question. None had been groomed to assume ownership responsibilities nor had the McCoys taken action to fund this type of buy out.
Transferring the company to children was impossible because the children of both owners were too young to be active in the company.
The McCoys' only exit option was to liquidate because their highly profitable company had little worth beyond the value of its tangible assets. After the liquidation sale, dozens of employees lost jobs and Jim and Tim left millions of dollars on the table.
Are your business-owner clients facing the same fate?
What Are You Going To Do About It?
Talk to your business-owner clients about two things: goals and planning.
Set Goals: An Exit Plan is completely based on a business owner's goals. Point to Tim and Jim as owners whose failure to set any led to a business liquidation.
Plan: A plan is as important an exercise as it is a product. As an exercise it enables owners to react quickly and effectively when circumstances change. As a product it creates transferable value in a way that is both cost efficient and frees up an owner's time.
Encourage your clients to engage in a systematic Seven Step Exit Planning Process™ that has helped thousands of owners to exit their businesses. One way to look at BEI's Exit Planning Process is to associate each Step with a question for business owners:
Step One Setting Exit Objectives: Do you know your retirement goals and what it will take--in cash--to reach them?
Step Two Determining Business Value: Do you know what your business is worth today, in cash?
Step Three Increasing Business Value: Have you identified the best ways to increase the value and cash flow of your company?
Step Four The Third Party Sale: Do you know how to sell your business to a third party without getting killed by taxes?
Step Five Transfer Your Business to Insiders: Do you know how to transfer your business to insiders (family members, co-owners, or employees) for cash rather than give it away?
Step Six Protect Your Business: Do you have a continuity plan for your business should you die or become disabled?
Step Seven Protect Your Family: Do you have a plan to secure your family's financial security should you die or become disabled?
These questions help to organize a business owner's thoughts so they can initiate the planning and actions necessary to answer them. Your job is not only to ask them, but to help your clients see the very real benefit of answering them.