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Exit Planning on a Budget: The Component Plan

Submitted by John Brown on Mon, 10/30/2017 - 6:00pm
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For many busy owners, comprehensive Exit Planning sounds time-consuming and expensive, and lacks any immediate financial or business reward. How can owners avoid these assumptions, and what can their advisors do to quell worries that comprehensive Exit Planning is a short-term waste of their time?

We suggest that as business owners begin to consider the importance of comprehensive Exit Planning, they also consider a far less expensive and time-consuming alternative: the Component Plan. This limited planning format addresses the owner’s immediate business or financial concerns.

A key feature of a Component Plan is that it detects owners’ “hot buttons” (i.e., the issues that most concern them) via assessments. This allows business owners and advisors to address those concerns and describe exactly how to do so. Essentially, it’s a bite-sized version of the full Exit Planning meal: It give owners an idea for what they want and need without requiring a blind commitment to the full course.

The Component Plan

Like the comprehensive Exit Plan, a proper Component Plan requires business owners and their advisors to quantify the owner’s goals, personal and financial assets, and Asset Gap. Once owners and advisors have established those key pieces of information, a Component Plan lays out recommendations consistent with at least one of the Seven Steps of a comprehensive Exit Plan.

But at which Step should business owners and advisors begin? How do you know which bite of the apple to take first?

Most BEI Members initiate Exit Planning engagements by having business owners identify their chief concerns using one of two simple assessments (the Exit Planning Assessment brochure or the Value Driver Analysis for Business Owners booklet). For example, suppose that the Exit Planning Assessment reveals that an owner’s strongest concern is motivating key employees. This tells owners and their advisors to begin by considering how to resolve this issue. Then, based on this information, Exit Planners suggest an engagement that focuses on this one aspect of Exit Planning—in this case, designing an incentive plan that motivates and retains the company’s key talent.

The Gap Analysis

Let’s consider another common Component Plan, one that aims to increase business value. To increase business value, business owners must first identify their goals and quantify their resources, which will help them discover their Asset Gap (i.e., the difference between what they have and what they need to exit on their terms). This Component Plan is also called a Gap Analysis. This Analysis provides owners and advisors with information regarding how much the company needs to grow in value and by when, which positions owners to achieve all of their goals and aspirations.

For example, consider two separate owners, Maribel and Joyce. Maribel’s goal is to exit the business in six years with financial security, and Joyce’s goal is to transfer ownership to her management team. In these cases, the Component Plan tells each owner about a different aspect that each needs to meet. In Maribel’s case, the Gap Analysis would tell her how much she needs to grow her business to close her Asset Gap in six years. In Joyce’s case, her Component Plan would recommend an incentive plan for management that would involve the transfer of ownership, rather than cash bonuses.

The key takeaway about Component Plans is that no matter their focus—whether motivating employees, acquiring another business, business continuity planning, or something else—they always include a consideration of the business owner’s exit goals.

Designing and executing Component Plans is fast and relatively inexpensive, and produces positive, quantifiable results. It also lays the groundwork for addressing the other Steps of a comprehensive Exit Plan, when business owners are ready to do so. After all, in completing the Gap Analysis, owners have laid the groundwork for all components. The next Steps an advisor suggests to the business owner are simply additions to the Component Plan that the owner and advisors have already begun.

In our next article, we return to our series on the three elements of successful Exit Plans with a discussion of the role of the Exit Planning Advisor.


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