Exit Planning is a step-by-step process. It does not happen overnight. Over 70% of business owners say they want to strategically exit their business but have not included exit and succession planning in their business plans. This leaves their business, and lives, open to many unknowns. Exit planning begins with the owner’s personal and professional goals. It then considers resources such as finances and timelines and then identify some of the most effective strategies to reach those goals.
Following are the key steps for Exit Planning
1. Knowing whether you can financially afford to leave your business.
2. Knowing whether you are mentally ready to leave your business.
3. Understanding what the business is worth to different buyers.
4. Knowing what the options are for transfer methods for your business.
5. Increasing the value of the business for you and a successor owner.
6. Using passive ownership strategies as a way to test your ideas about leaving your business.
7. Understanding the likely successful transfer method of your business.
8. Finding a successor owner for the business. (or hopefully more than one successor)
9. Going through the actual transfer process.
10. Investing your proceeds.
11. Planning for your family and yourself as an ex-business owner.
12. Estate and legacy planning.
Exit Planning Process
Strategic Business Exit Planning Process will happen in three distinct phases. This is generic however the phase cycle timeline in number of days will depend on the objective and requirement of the urgency of the exit process.
Phase-1: The Discovery Phase.
The discovery phase gathers information, before making any decisions. The business owner collects both personal and business details in order to analyze how they will work together in the business exit planning process. Information is collected about:
· Personal life goals
· A legacy succession plans
· Family business succession planning
· Financial goals relate to the exit planning
· Valuation of the business by 3rd party, whether or not the business is for sale as part of the exit strategy
· Creating an action plan and shifting the priorities of previous business plans as required.
Phase-2: The Execution Phase
In this phase the business processes re-challenged. Every aspect is questioned and compared to the competition. These specific areas are reviewed and updated:
· Vision & Mission Statements, writing them if they have not been written before.
· Business objectives, especially those that my have interference with exit planning
· Branding strategy, for the brands
· Marketing Strategy, both digital and analog
· Sales strategy, including a review of personnel, hardware, software and procedures
· Operations management, logistical and personnel, particularly as they relate to the exit strategy
· Financial management, as exit planning includes making the company more viable for sale and company finances are requirement
· Holistic human capital analysis
· Employee engagement, at all levels of the organization
The Execution Phase is then divided into 90-day cycles.
Phase-3: The Assessment Phase
The exit strategy is reassessed every 90 days in the Assessment Phase on the Execution Phase timeline. This will compare progress directly to the financial and personal life goals of the existing business owner.
· Assess objectives as they were identified in the Discovery Phase
· Once objectives are met, re-evaluate the business by a 3rd party
· Make a final decision to sell the company or spend more facilitating
Developing an exit strategy is best done as early as possible, as soon as the business owner can conceive of the idea of exiting the company. Planning an exit may not be for retirement, but for continuity due to potential injury, accident, illness or disability of the owner in order to maintain income for the family. Often exit planning is completed because the current owner has another business idea to pursue, so capitalizing on the old business becomes an excellent strategy to begin the next.
The best time to begin is now. Use care, professional advise and much deliberation when managing your exit planning and the succession plan and the owner will find that the business exit can be much smoother that the owner otherwise imagined.
The process teaches that exit strategy is business strategy. It is about building, harvesting, and preserving family wealth for generations to come and integrating best in class business practices into daily operations. The Methodology focuses on enterprise value and is a revenue producing model for professional advisors as well as a common language for all parties from all specialties navigating the exit planning conversation.
A business valuation is essential to understand what your business is worth. It needs to linked to a financial plan to determine if the owner will have enough money to retire or to invest the sales proceeds after the business is sold. The difference between the owner’s current net worth and the wealth needed to retire/invest in other ventures is called the value gap. In many situations, the biggest component of the owner’s net worth is his or her business to be exited/sold. Reducing the value gap is generally the most important step in the exit planning process. This is accomplished by “de-risking” the company. What drives value in the eyes of a buyer is a risk, Higher risk companies are worthless to buyers and lower risk companies are worth more.
The de-risking process is started by completing an overall assessment of the company. The assessment includes areas such as management strengths, revenue drivers, and business contacts. Addressing weaknesses in the company creates value that is transferable to the buyer. The mission of the exit plan is to create value within the company that is separate from the business owner, Eventually, the business owner will exit their business; the goal is for vale to stay with the company, and not exit with the owner.
Companies operating at their full potential inherently sell well as they are attractive to buyers. They will also hold their value when the market becomes saturated with the businesses for sale. The M & A market has strengthened in recent years, and t has very much been a seller’s market. However, this will not last forever. With Baby Boomers beginning to retire/exit their business, a significant amount of businesses will become available over the next 5 to 10 years. The market will turn into a buyers’ market. When that happens eventually (sooner than later) turns into buyers’ market. When that happens, the increased competition among sellers will begin to drive sellers’ prices down. This is where the true value of the exit planning process comes into play.
Even with increased competition from other sellers, a well-run business that is organized with an exit plan in place is more attractive to prospective buyers. Done right, the exit plan will ensure a smooth transition and maximize the company’s financial health, increasing the chances for a profitable sale even in a buyer’s market.
Action Plan & Due Diligence Process
On completion of the de-risking process and post-decision of the sell of the business/part of the business, the owner is to initiate the selected transaction solution and start the Seller’s Due Diligence process. Following are the Due Diligence Checklist/Action List at the final stage of the Exit Planning process.
1. Develop an Exit Plan- The business owner has made a strategic decision to begin transition planning. Several decisions must be made to formulate the exit plan.
· Understand that everyone eventually will leave the business unit.
· Be in control of the succession plan (if there is one) or sale to a third-party buyer in fill or part/equity split. A significant amount of time is dedicated to getting the business ready for sale from a financial perspective.
· Document primary goals for selling the business. Goals include quantifiable amounts, but often qualitative issues are important, such as continued employment of key employees and keeping the business operate in the same locale.
· Anticipate your living requirements post-transaction. Ask yourself: “What will you do one week, one month, and one year following the sale of the business”? Making a healthy behavioral adjustment following the sale is important.
· Estimate your living requirements (and your family’s) financial requirements in retirement, ensure that there are sufficient assets to maintain the living standard.
· Maximise the cash payment for the business at the closing date agree to deferred payments only with adequate security. Remember, once the business is sold, control of the company is surrendered to the new buyer. Ensure that you have enough cash at the closing date to adequately cover such items as taxes, professional fees, and broker fees (if applicable)
· Clarify who (Buyer/Seller) is responsible for all applicable closing costs in sale/purchase agreement?
· Clarify negotiation points such as non-competition agreement, consulting or employment agreement, and contingent payment agreement.
2. Identify Key Members of the Transition Team.
· Partner or Key Members
· Board of Directors
· CPA- Make sure you understand the tax- and cash flow implications of the transaction. Make sure you have enough for retirement.
· Attorney- Find an attorney with successful transaction experience, because your legal interests will be in his hands
· Exit Planning & Implementation Adviser
· Business Valuation Adviser- Negotiate from an informed position of strength and retain a business valuation professional who is independent and can offer objective advise. Many deals never close because of unrealistic valuations expectation by the seller.
· Personal Financial Adviser (Tax Planning and tax efficient investment vehicle advise)
· Business Intermediary or business broker- Experienced business brokers are often focused and professional, but remember they are success fee dependent and are oriented to earning the success fee. Find a business broker with specific success within the industry for optimal results.
3. Optimise the value of the business.
· Decide that optimizing the value of the company is a primary goal. This often requires managing the business to be successful and profitable, which may be different from the culture of servicing and minimizing tax liability.
· Talk to or engage a business valuation professional. Do not exclusively rely on a business broker to value the business due to obvious conflict of interest.
· Research transactions in the industry /as per the SIC code.
· Do not commingle personal or business activities
· Demonstrate the profitability and financial returns possible in the business. If profitability is possible only by a wide range of adjustments and add-back amounts you lower your negotiation stance with potential buyers.
4. Financial Statements.
· Consider having financial statements prepared by a CPA, reviewed or audited with applicable footnotes from a third-party consultant.
· Anticipate that buyers prefer CPA-prepared financial statements. Financial Statements prepared by an independent CPA will increase negotiating strength.
· Ensure that Historical financial statements are comparable between years.
· Remove personal activities from the business.
· Insist on having a strong operating computer system supported by appropriate internal control.
· Have articles of incorporation or other founding documents
· Update company by-laws
· Verify title to all assets
· Update all applicable company resolutions and authorizations to proceed with the transaction.
5. Offering Memorandum.
· Not always required, an offering memorandum is a good sales tool if the business is marketed to third parties.
· If selling to a third party, the memorandum is a useful sales tool to communicate the business to prospective buyers
· Make sure information in the memorandum is accurate
· If the memorandum is prepared by a business broker, verify the responsibility for all the costs associated with the business brokers efforts.
6. Key Employees.
· Identify key employees who are essential to the operation of the business
· Consider a key employer retention program during succession process
· Consider including key employees in transaction proceeds if they stay during sales proceeds.
· Key employees will typically know the business s for sale and will often feel betrayed or disappointed if the owner have not confided in them.
7. Investigate the Buyer.
· Once the target buyer is identified, investigate the buyer’s background and reputation. Employ the full spectrum of resources including such as newspapers, digital media articles, business associates, banks, professionals, including authorities, and any other reliable sources.
· Investigate the financial resources of the buyer. Complete credit check using appropriate sources such as Dun & Bradstreet. Verify the buyers banking relationships and ask for references.
· Ensure that all prior loan defaults and bankruptcies (if there are any) have been disclosed, especially if seller-deferred payments as part of the transaction.
· Research public records for litigation involving the buyer as plaintiff or defendant.
· Review the business plan of the buyer following the sale if deferred payments are required.
8. Anticipate Seller Financing.
· While seller financing is not an absolute requirement, the overwhelming percentage of transactions have some seller financing as a requirement.
· Anticipate seller financing and how best to collateralize the note. Collateral will include the assets of the business being sold, but consider additional security such as the assignment of specific assets or a personal/corporate guarantee.
· Negotiate an interest rate commensurate with the risk, especially if the seller is required to subordinate to a bank.