Exit planning is a business strategy and chances are, you are not prepared. Take the right steps now!

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Exit Planning For Your Company

Exit Planning

Exit planning is a business strategy. It assimilates your business, personal, and financial goals and serves as a guide for success. According to Christopher Snider of the Exit Planning Institute (“EPI”), exit planning combines the plan, concept, effort, and process into a clear, simple strategy to build a business that is transferable through strong human, structural, customer, and social capital. The future of you, your family, and your business are addressed by exit planning through creating value today. To keep it simple, business owners should focus on what they can do right now to make the business and personal planning better.

To keep it simple, business owners should focus on what they can do right now to make the business and personal planning better.

1. Survey

A 2013 EPI survey called the State of Owner Readiness Survey, concluded the following:

  • 2/3 of business owners are not familiar with all exit options;
  • 78% have no formal transition team, 83% have no written transition plan; and 49% have done no planning at all;
  • 93% have no formal life-after business plan;
  • 40% have no plans in place to cover illness, death, or forced exit;
  • 50% of all owners need the company to remain profitable during and after the transition plan, yet 86% have not taken on a strategic review or a value enhancement project; and
  • 56% felt they had a good idea of what their business is worth, yet only 18% have had a formal valuation in the last two years.

What would your answers be to this survey? If you find yourself saying, “I don’t have most of these” or, “I don’t have any of these” then it appears you are not alone.

2. The Privately-held Industry

There are nearly 28 million privately held businesses in the United States today with roughly six million are operating companies representing approximately $30 trillion in sales. The majority of these companies have $5 million or less in annual sales, which are considered to be in the Micro Market.

America alone sits on a stockpile of privately-held business wealth, over $10 trillion. According to a 2016 survey by the EPI, the transfer of this wealth is set to start in the next 10 to 20 years (primarily due to an aging Baby Boomer generation retiring) with 76% of surveyed respondents indicating they would transition within 10 years. This will be the largest transfer of wealth in the history of mankind! What impact do you believe this will have on the market when these transactions begin to occur? More than likely, valuation multiples will begin to decrease (meaning less sales proceeds) and only the best companies in each industry will (1) have the option to sell; and (2) will sell at above average prices.

3. Success Rates

According to data published by the EPI, only two out of 10 business that go on the market will actually sell. A full 80% will not. Of the companies that sell, many will receive a lower multiple or sale price due to factors that include poor or nontransferable intangible assets. Only the most attractive and ready businesses will move into the next stage of their life cycle. Additionally, businesses that transfer to family members are not immune to this issue. According to the Family Firm Institute, historical data shows that family businesses only have a 30% success rate after transferring the business to the second generation, 12% to the third generation, and 3% to the fourth and later generations.

What impact do you think this will have on your company if a majority of you dealers, distributors, and vendors are unable to successfully sell and shut down when the owner retires?

Many companies rely on a network of dealers, distributors, and vendors that are vital suppliers of goods and services throughout the supply chain. Let’s also assume that a majority of these dealers, distributors, and vendors are operated by an owner in the Baby Boomer generation. According to the surveys mentioned earlier, 75% of these businesses will be looking to retire within the next 10 years and only 20% to 30% will be successful. The remaining companies will not remain profitable and could shut down as a result. What impact do you think this will have on your company if a majority of you dealers, distributors, and vendors are unable to successfully sell and shut down when the owner retires? Ask yourself, what am I doing to ensure that my supplier base stays in tact?

Owners need to have a growth mentality. If the business is not growing, then the perpetual value of the business is weakening. An owner looking to transition the business to family members is transferring an undercapitalized business making it even tougher for them to succeed due to the transition of wealth on the horizon.

Owners need to have a growth mentality.

4. Planning

According to a 2016 survey by the Exit Planning Institute (“EPI”), 66% of business owners have not completed any formal education related to transitioning their business. And, why would they? For the majority of owners, exit planning is a once-in-a-lifetime event. The reality is most business owners are not educated about how to exit, let alone what exit planning really is.

One of the major problems with the lack of exit planning is advisors are not properly advising. If you ask your estate tax professional about exit planning, they will tell you the important estate tax issues with the transition. A tax advisor will indicate the tax implications. A financial planner will reveal your personal financial position. A business valuation professional will just tell you the fair market value of your company.

Most advisors are experts in their field and it can be difficult to build a “dream team” consisting of accountants, financial planners, and lawyers. This makes the process appear complicated and time consuming. Also, most advisors are focused on the end game and do not take a holistic view of where you are, where you want to go, and how to get there. A good advisor knows how to manage this process and takes the responsibility of bringing everyone together. A good advisor also knows that they need to get a handle on the owners’ current business and personal financial position as well as their long-term goals.

A good advisor knows how to manage this process and takes the responsibility of bringing everyone together.

5. Sellers Remorse

According to a study by Price Waterhouse, business owners struggle with the exit of their business for a variety of reasons, and that 75% of those who exit “profoundly regret” the decision within 12 months of exiting. This is mostly due to a failure to plan for the next phase of the business owners’ life.

Exit planning doesn’t have to be all encompassing meaning you sell the company outright and have no connection with the business once it is transferred. If you plan properly, you can stay in the business and continue to receive income while not managing the day-to-day operations. Additionally, the financial crash of 2007 and 2008 put many business owners’ retirement and succession plans on hold. Many business owners have not revisited thoughts of exit planning since the financial crash.

6. The First Step

The first step in any exit plan is to identify what you already have, which provides a baseline going forward. This should be done for your personal finances and for the business. Personal finances should be easy to accumulate as they would consist of assets that you already know you have (i.e. bank accounts, brokerage accounts, land, etc.). However, a crucial and often overlooked step is identifying the current value of your business. A business valuation specialist will be able to identify not only the current value of your company, but more importantly how to increase the value and transferability of your business. They can also identify actions an owner can take to de-risk the business making it more financially palatable.

According to a survey by the Alliance of Merger & Acquisition Advisors, 95% of M&A advisors indicated an owner’s perception of value compared to its real value is the number one factor why businesses don’t sell.

Unfortunately, most business owners do not have a realistic view of the value of their business and its contribution to their overall net worth. According to a survey by the Alliance of Merger & Acquisition Advisors, 95% of M&A advisors indicated an owner’s perception of value compared to its real value is the number one factor why businesses don’t sell. Christopher Sniders’ book Walking To Destiny, uses an analogy from Andy Kuhar, a board member of EPI, calling this “Ugly Baby Syndrome.” Many owners believe they have an idea of what their company is worth and may not appreciate someone telling them their business is not worth what they thought it was. In any case, it’s still your baby.

Business owners only see the financial information they report and the tax numbers prepared by their tax accountant. Accounting systems are not built to provide business owners with regular feedback on the “real” number and what they can do to improve it.

Business valuation practitioners restate financial information to demonstrate the true picture of the company’s cash flows and assets, liabilities, and net worth. Financials are adjusted for items like non-recurring expenses, excess/deficit officer compensation, and non-operating assets to name a few. These financial adjustments have a major impact on the value of a business and your accounting department and tax accountant do not make these adjustments because they must follow the Generally Accepted Accounting Principles (“GAAP”). Business valuation specialists generally start with GAAP financials and adjust them to economic reality, which has a major impact on your company’s valuation.

7. Find A Business Valuation Specialist

Find a local advisor who is familiar with the exit planning process. A good advisor knows that they need to get an appraisal of the company now, not later. If you prefer to find a business appraiser yourself, feel free to use the downloadable questionnaire (located at the bottom) to find a certified business valuation specialist in your area. Remember, a good advisor knows how to manage this process and takes the responsibility of bringing everyone together. A business appraiser should help facilitate the exit planning process by coordinating advisors and building your “dream team.”

DOWNLOAD QUESTIONNAIRE
A good advisor knows how to manage this process and takes the responsibility of bringing everyone together.
Exit planning is a business strategy and chances are, you are not prepared. Take the right steps now! was last modified: April 5th, 2019 by madbird