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How Long Does a Business Exit Take?

Submitted by John Brown on Fri, 04/11/2014 - 10:26am
Hourglass

If you are desperate, you can likely exit your business within a year. But leaving in style (i.e., achieving your Exit Objectives) takes time, far more than most owners believe.

So, you can leave when you want, but without achieving all of your goals, or you can leave in style, but not as soon as you want. These options are unsatisfactory, but fortunately, there’s a third option.

To avoid these unsatisfactory options, you must begin planning and executing a strategy to accomplish your exit goals well before you are ready to leave. Otherwise, it’s highly unlikely that the business will be ready for transfer when you are ready to transfer it.

Over the years, I’ve learned that every business owner defines “leaving in style” differently, but usually, that definition includes the following:

  • Having the cash they want when they leave.
  • Ensuring that their chosen successors are in place when they leave.
  • Beginning the transition to a purposeful new life.
  • Achieving all of the values-based goals they want their businesses to accomplish before they turn over the reins.

These exit goals take time to achieve. Once you understand how long each will take to accomplish, you will know how soon to start your race to your exit finish line.

How long will it take you to exit your business? There’s a different answer for each owner, but there are some time-consuming tasks common to all exits.

Design and create your Exit Plan

Time frame: 90 days to 1 year

While it is possible to create an Exit Plan in as few as 90 days, most Plans require almost a year to create. Most owners need time to ponder and weigh alternative paths, and to think through the many issues that arise when they move through BEI’s comprehensive Exit Planning Process for the first time. 

Close the value gap

Time frame: 5–10 years (often varies)

There is likely a gap between the value you need to receive for your ownership interest and the value you are likely to receive if you transfer the business today. The time it takes to close that value gap depends on the following:

  • By how much does the business need to grow?
  • What is a realistic growth rate for your business in today’s economy?
  • How much business capital is available to sustain accelerated growth?
  • What is the estimated growth rate of your non-business investment assets?

The time required to close the value gap is the wildcard in estimating when you will be able to leave your business in style. Given common headwinds, the surest way to create sustainable growth is to create a written growth plan that includes deadlines and accountability as part of your overall Exit Plan.

I find that most owners are in denial when it comes to objectively quantifying the size of their value gaps and determining exactly how they are going to close them within their planned departure time frames. The reason behind the denial of what is generally a large gap is that most owners have no plan to close it other than “work harder.” Owners typically don’t know how to build value consistently at the pace necessary to achieve financial independence.

Tax planning and implementation

Time frame: 3–10 years

Part of reaping full value for your company involves minimizing taxes. Keep in mind that one of today’s headwinds is increased taxes on income and capital gains. Fortunately, planning can legally minimize (or even eliminate) taxation upon the transfer of ownership interest and save on taxes annually. Of course, the IRS does not make this easy. Some tax-saving strategies (e.g., converting your business from a C, or regular, corporation to an S corporation) take as many as 10 years to fully implement. Others take just a few years, such as changing your residency to another state to avoid state income taxes on the transfer of your ownership interest. Regardless, if you leave tax planning until you’re ready to exit, the IRS wins.

Transferring your business to children or employees

Time frame: 3–10 years

It is possible to transfer your entire ownership to a child or employee by simply transferring ownership in exchange for a promissory note. However, this is a form of financial suicide. If you wish to transfer ownership to children or management while achieving your financial and other objectives, you need time to do the following:

  • Grow business value and cash flow. As growth occurs, you benefit from increasing distributions of excess business income and can invest the net proceeds in non-business investments.
  • Develop the incoming owner’s management and ownership skills.
  • Begin a methodical transfer of small amounts of non-voting ownership to children or key employees based on their achievement of pre-set performance standards. During this time, you retain full control of the business until your children or management can pay cash—enough to ensure your financial security—for your ownership interest.
  • Ultimately transfer the balance of your ownership interest for cash after your children or key employees have acquired sufficient equity to borrow money to pay for your remaining ownership interest.

Some transfers to management or children occur in as few as three years when the value gap is not large. These owners keep full control of the business until the end of the three-year period. In most cases, there is a more gradual transfer of ownership interest to allow (a) the owner to receive income from S distributions, (b) incoming owners to acquire skill and experience, and (c) time for the value of the remaining ownership interest to increase.

Sell your business to an outside third party

Time frame: At least 1 year

Assuming your transaction advisor determines that you are likely to receive the money you want from the sale of your business, your last step before beginning the sale process is to engage in pre-sale planning. This involves having your advisors review the structure and operations of your company to discover and properly bury any “skeletons” that might stall or halt the sale process.

A few examples of skeletons are potential lawsuits, disgruntled minority owners, and inventory accounting discrepancies. These skeletons can derail the sale process in its tracks.

An adage of deal attorneys is that “time kills deals.” You don’t want correctable problems to cause delays, and the pre-sale planning process helps prevent this. Pre-sale planning takes but a few months, but correcting problems that are discovered can take several more months. Once remediation is completed, the sale process begins and is usually complete within a year. Obviously, if your transaction advisor has good reason to believe that your business cannot be sold for the price you need, you will need more time to accomplish all of the actions necessary to close the value gap.

Conclusion

Every owner’s exit time frame is contingent on both the owner’s goals and the business’ readiness for transfer. Today, few businesses are sufficiently prepared for transfer due in no small part to the headwinds that make all of our efforts more difficult and time-consuming. Headwinds and lack of preparation make accurately estimating your departure date more difficult than ever.

I am confident in saying that almost all owners today are ready to exit their businesses long before their businesses are ready to be exited. If the time before the business can be successfully transferred drags out for years after owners feel ready to exit, those owners face burnout and frustration, and lose interest in the business, making it even hard to build its value.

In future blogs, I will discuss how to best build transferable value, minimize taxes, and achieve the goals you set when you begin exiting your business. It takes a lot longer to build adequate transferable value than it does to decide you are ready to exit. That’s why the most prudent plan is to ensure that the business is ready to be exited when you are ready to exit.