Many business owners have not properly planned for the ownership and control transfer of their privately held company to ensure that they exit the company with the amount of funds necessary to support their retirement. Whether the goal is to exit the business in six months or ten years, it is critical that a business owner recognize that succession planning is the single most important way to take control of the terms and conditions of exiting their business.  At some point in time every business owner will exit their business, which, in most cases, represents a significant component of family wealth.  Taking a proactive approach to maximize this value and plan for the day when the business is either sold to an outside 3^rd party or key employee, or transferred through an orderly succession to a family member, is the primary goal behind the exit planning process.  The purpose of this article is to briefly review the exit/succession planning process and highlight the importance that these plans have for every business owner. 

An exit plan is a written road map that is implemented over a period of years, designed to maximize the value an owner receives when exiting the business. Proper exit planning will reduce the variability of the business ownership and control transfer, and will secure a solid financial future for owner.  Exit planning, also commonly referred to as “business succession planning,” is a methodology that addresses three critical questions a business owner will face at some point in time:

1.    Who will succeed the owner when the business is transitioned or sold?

2.    How much income is needed from the business transition/sale for retirement?

3.    What is the timetable the owner seeks to exit the business?

A properly prepared exit plan will be developed in conjunction with legal, financial, and accounting professionals.  Based on the size and scope of the business, exit planning can be a fairly complex process which could take many years to properly implement. Fortunately, the process can be broken down into individual deliverables and action items whereby value can be recognized very early in the process.  A professional team will bring tremendous efficiency to the process by developing the basic structure for the steps to be followed ensuring that the experience will be a financially rewarding and a personally gratifying endeavor for the business owner.  An exit plan is fairly easy to initiate and in most cases could be started at a nominal expense. 

The key steps involved in developing an Exit Plan include:

1.    Establishing Exit Objectives

·         Determining the retirement timetable, long term income needs, and financial requirements necessary to reach them.

2.    Identify the key drivers of business value

·         What is the fair market value of the business if it were sold today?

3.    Plan to build & preserve business value and reduce risks

·         Activities that can be implemented to leverage best practices and maximize the business value.

4.    Transfer of ownership, management, & control

·         Determine the anticipated buyer (outside 3^rd party, key employee, family member) and develop the structure for ownership transfer that maximizes financial security while minimizing taxes. 

5.    Contingency Planning

·         Protect the continuity of business operations should an unexpected event occur.

6.    Wealth management/preservation

·         Secure financial independence by developing a financial plan to manage the income from the business sale. 

7.    Successful Exit

An experienced business intermediary firm will be able to streamline the exit planning process significantly by taking the lead in the planning structure and tapping the necessary resources (accounting, law, wealth management) over time as they are required. This team concept is very cost effective for the company owner as they are only paying for the required services at the time of use.  A business owner is now able to initiate the plan and establish the basic framework for the exit plan at minimal cost. By establishing the fair market value of the company in conjunction with a determination of the owner’s exit timetable and the income needs for retirement, the Business Intermediary will have the necessary elements to build the foundation of the exit plan.

The most successful and rewarding succession plans are those that are initiated years in advance of the anticipated business transition.  Implementation should be viewed as a process versus a one-time event. The more time that a business owner has available to implement the exit plan, the greater the opportunities will be to maximize the business value, avoid key employee turnover, minimize tax liabilities, and eliminate emotionally charged family issues.

Michael Fekkes is a Senior Broker at Enlign Business Brokers in Nashville, TN.  Michael is a Certified Business Intermediary CBI®, a member of the International Business Brokers Association IBBA®, as well as a former business owner.  He can be reached at 615.535.1150 or mfekkes@enlign.com.  Enlign Business Brokers (www.enlign.com) is a Professional Services Firm serving the Southeast that is headquartered in Raleigh, NC with regional offices in Nashville, TN and Atlanta, GA. providing business intermediary services ranging from valuation and sale to exit & succession planning strategies.