Exit Planning, Optionality, and the Ideal Exit Path

Submitted by John Brown on Fri, 08/02/2019 - 12:00pm
A board game with different colored pawn pieces.

Back in 2014, an organizational consultant named Simon Sinek defined the concept of the Golden Circle. The Golden Circle consists of three layers: The outer layer is the what, the thing people do. The middle layer is the how, the resources and strategies people use to do the thing they do. The inner and most important layer is the why, the reason people do the things they do. Like Sinek suggests, we started by outlining the why behind shaping a business exit. Then, we examined the how behind a successful business exit. Today, we’re going to look at the what behind shaping an Exit Plan, which is choosing an ideal path and providing optionality.

Isn’t Pursuing the Ideal Exit Path Most Important?

When many business owners first think about their business exits, their first question is, “Whom am I going to sell this business to?” For example, according to a BEI survey, 59% of owners think they want to sell their businesses to a third party while 30% say they want to transfer the business to a child or family member, despite the fact that 83% of surveyed owners admitted that they didn’t have a documented Exit Plan. Most advisors, especially those without Exit Planning experience, will take these wants and assume that they must pursue them for their clients. But this is a backward way of shaping an Exit Plan. Consider the short story of Bob Roberts.

Bob Roberts had had 40 years of success running his hometown disposal company. He was ready to sell to a third-party buyer who had approached him a year earlier. The buyer told Bob that they were willing to pay him $6 million for his business, which Bob thought was more than enough to last him through his retirement.

Not long before Bob was set to close the deal, he received startling news. The buyer planned to absorb Bob’s fleet of trucks and book of business, and lay off 47 of his 50 employees. Bob cared far too much about his employees to let that happen. He demanded that the buyer keep his employees as a condition for the sale. The buyer refused, and Bob took the business off the market.

In this example, Bob didn’t realize how important one of his values-based goals was because he never examined it. He dove headlong into pursuing what he thought was an ideal path. In reality, his ideal path was fraught with problems he could have avoided.

Optionality in Exit Planning

Optionality is “the value of additional optional investment opportunities available only after having made an initial investment.” In Exit Planning, optionality means the ability for owners to choose an ideal Exit Path while still having the option to pursue other paths. The “initial investment” is setting goals and determining resources. The “additional optional investment opportunities” are essentially the Exit Path owners choose. This optionality is extremely important because conditions, situations, and wants can change throughout the Exit Planning Process.

To most business owners, choosing the ideal Exit Path is the what behind Exit Planning. It’s a result, and because business owners are typically results-driven, it’s where they want to start. Exit Planning Advisors know that before pursuing a path, they must help owners determine whether their chosen path can achieve their goals, and whether the owner even has the resources to pursue a given path. Doing so creates optionality in Exit Planning.

Optionality is valuable in Exit Planning because it gives owners freedom to pursue their exits on their terms. But optionality cannot exist unless owners know their goals and resources. Choosing an ideal path isn’t the end of Exit Planning: It’s the means to the end.

Generally, there are four paths business owners can take to continue the business after they leave it. Let’s look at each path and examine why owners might want to pursue it.

1. Third-Party Sale

2. Transfer to Employees or Management

3. Transfer to Children

4. Sale to an ESOP

Regardless of which path owners choose, one thing is always true: Owners and advisors cannot choose an ideal Exit Path unless they know what the owner’s ideals are. An owner who wants to exit their business in six months but sell to an insider will probably be unable to choose an ideal path at the outset. Only after weighing why they want what they want against how to get what they want can owners begin to seriously consider any Exit Path.

Owners want to start with the ideal path (the what). Advisors must help owners uncover their goals (the why) and resources (the how) first. Exit Planning provides the optionality owners crave, and Exit Planning Advisors provide the process owners need to achieve it.

Takeaways

  • Business owners have ideas about what their ideal Exit Path might be and often want to start the conversation there.
  • Advisors must help owners determine whether their supposed ideal path lines up with their goals and resources.
  • Exit Planning starts by establishing goals (the why) and resources (the how) before determining an ideal path for owners (the what).
  • Choosing an ideal path isn’t the end of Exit Planning. It’s the means to the end.


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