Exit Planning Begins With Step One: Setting Goals

Mon, 02/29/2016 - 06:00


In our last post, we mentioned The BEI Seven Step Exit Planning Process™, the proven, owner-centric process that advisors use to help owners plan successful exits from their companies. The Process benefits business owners and their companies, even if they never plan to exit, and it begins and ends with owners’ universal Exit Objectives: (1) the date the owner wants to leave, (2) the money the owner wants in the bank when he or she leaves, and (3) the successor the owner chooses to take over the business.

Once business owners set these three objectives (with help from their Exit Planning Advisors and the Exit Planning Advisor Team), they can proceed through the next six steps of the Process, including determining, building, and protecting business value; managing and coordinating business continuity and estate planning issues; and finally, executing the transfer so that it meets the owner’s financial and other goals.

For some business owners, a thumbnail sketch of an Exit Plan is adequate. They know they should be planning for the most significant financial event of their business careers, and they like that the Exit Planning Process is all about them. Advisors can immediately dive into the Exit Planning Process with these owners. However, other business owners may need more of an explanation. They might want to know exactly how the Process works or why they can’t skip some of the steps, including Step One.

To explain why they can’t skip Step One, Exit Planning Advisors need to inform their clients about three pieces of information that must be accurately quantified before anyone can create a coherent or comprehensive Exit Plan: (1) a target departure date, (2) a preliminary Financial Needs Analysis, and (3) a chosen successor.

The reason many business owners never begin Exit Planning is that they have not spent any time considering the terms and conditions under which they would happily leave their businesses. Owners will not begin Exit Planning unless and until their Exit Planning Advisors initiate a discussion about those terms and conditions (i.e., their exit goals). This discussion involves Exit Planning Advisors asking owners a lot of “why” questions designed to clarify their thinking and uncover goals they may not be aware of. To do that well, Exit Planning Advisors need a solid understanding of exit goals, so let’s begin with the goal most owners consider first.

Business Target Departure Date

Setting a target departure date is indispensable to creating an Exit Plan. A plan for an owner who wants out in two years looks quite different than a plan for the same owner with a 10-year exit timeline. The BEI 2016 Business Owner Survey Report showed that 57% of owners intend to exit their businesses within 5 years, and 79% intend to exit their businesses within the next 10 years.

Types of Departure Dates

Interestingly, though departure date is often the first objective that owners set with confidence, it is also the objective that changes most throughout the Exit Planning Process. This ongoing tinkering is so prevalent that Exit Planners refer to it as the “perpetual five-year Exit Plan.” Owners want to exit in five years, but since they never start the Exit Planning Process, they are always five years away from leaving. These owners typically pick a date (e.g., five years from now) out of the air. Since the date has no particular meaning to them, it’s easy to ignore. Advisors can determine whether a departure date holds meaning for an owner by asking several questions, such as, “Why do you want to exit in five years? What do you see yourself doing in five years?”

Many owners pick an event-related departure date, such as when their youngest child graduates college. Other owners want to remain until the business’ value reaches a certain level or the business can operate without them. Still other owners base their exit dates on more personal reasons. For example, they may calculate the number of active years they want to live without working to arrive at a departure date.

Departure Dates Prompt Action

When business owners set a departure date based on their personal aspirations, they are more likely to take action. These owners are pulled into action because they want to exit on a specific date for specific reasons.

The message is clear: If business owners don’t set a departure date, they give themselves room to procrastinate. Procrastination begets inaction, and without action, the owner has no Exit Plan and the Exit Planning Advisor doesn’t really have an Exit Planning client. Thus, owners must set a departure date to give their Exit Plans a stable framework, even if that date is only tentative. Until that date is set, neither the owner nor the Exit Planning Advisor can begin to create a successful Exit Plan.

BEI Members ambitiously engage owners in Exit Planning conversations. They ask a series of open-ended questions designed to help owners recognize both their goals and the challenges they face in exiting successfully on their chosen departure dates.

In our next article, we’ll explore the issues that arise in Step Two of The BEI Seven Step Exit Planning Process: Quantifying Resources.

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