Business Management Articles
Reduce Stress and Raise Returns with an Exit Plan
Jason Kwiatkowski
Plant Magazine
January 2010
Would you like to reduce stress and make money? The way to do this may surprise you.
An exit plan.
Consider that front line baby boomers turn 65 next year. Among them are business owners who are driving the largest transfer of private wealth in history. Forty percent of boomers with private family businesses intend to retire within the coming five years.
Many are relying on the proceeds from the sale of their companies to fund their retirement. Yet as more boomers put their enterprises on the market, the growing supply of businesses will exert downward pressure on sale prices. This translates to lower returns and more stress.
In fact, the number one reason business exits fail is lack of planning on the part of the owner. Rather than being proactive, too many business owners are reactive, “forced” to sell because of burnout, health issues, marital problems or business conditions.
Unfortunately, these types of “fire sales” leave too much money on the table.
On the other hand, owners who invest time and effort to prepare for a sale ultimately sell their companies for a significant premium over those that come to market unprepared. Therefore if you intend to sell your manufacturing business in the coming decade, you need to prepare well in advance in order to control the timing of the sale and to maximize net proceeds. Here’s an approach that can help you do this.
First, planning should begin several years prior to a sale. In a Newport Partners survey of more than 100 Canadian business sellers, 62% recommended methodically pre-planning the sale of a business two to three years in advance. Less than 25%, however, actually did so themselves.
Proper preparation of a business for transition begins with creating a formal exit plan. This is a document that sets out the steps that will accomplish an owner’s goals when exiting the company. An exit plan addresses the business, personal, financial, legal and tax issues involved in transitioning a privately owned business to new owners.
There are significant benefits to having a formalized exit plan.
- Achieve business and personal goals
- Retain control over how and when the business is exited
- Maximize company value in good times or bad
- Minimize, defer or eliminate capital gains taxes upon the sale of the business
- Reduce stress and tension among the owner, family and employees.
To be effective, an exit plan needs to integrate the following six components.
- Goals Assessment
It’s vital to determine business, personal, and family/estate goals in order to provide direction and a frame of reference for the plan. Each goal should be specific, measurable, achievable, realistic and time-framed
- Financial Needs Assessment
A financial needs assessment identifies the funds the owner needs to realize from the sale of the business in order to achieve his or her goals. A financial planner can assist with this component of the plan.
- Business Valuation
An independent business valuation will establish a current baseline value for the company. This valuation should be conducted by a professional business valuator at least three years prior to exit. This allows time to implement any measures – such as growing revenues, increasing margins, strengthening the management team, diversifying the customer base – that may be required to raise the value of the business.
- Exit Alternatives Analysis
An exit plan must assess the pros and cons of exit alternatives as they relate to the owner’s goals. Internal transition options involve a sale to family members, existing shareholders, management team or employees. Alternatives for external transfers include third party sales, refinancing or going public.
- Net Proceeds Analysis
Net proceeds represent the net amount a business owner retains after selling the business and settling all liabilities, income taxes and other obligations. Thus net cash received upon sale can be significantly lower than the sale price. Conducting a net proceeds analysis for each relevant exit alternative therefore helps to ensure that net proceeds will achieve the owner’s business, personal and family/estate goals.
- Action Plan
The final component of exit planning is an action plan for the business and for the business owner. This involves identifying the specific tasks that must be carried out, such as obtaining appropriate insurance, completing tax and estate planning, finalizing a will, preparing a contingency plan, developing a strategic plan for the business, etc. In addition, the timing and priority of each task needs to be identified along with the individual(s) responsible for those tasks. Finally, it is critical to schedule regular meetings with those guiding and implementing the exit plan to ensure it progresses as intended.
Procrastination is often the key impediment to effective exit planning. When this is an issue, involving an accountant, lawyer, financial advisor or a certified exit planning advisor can help to kick start the process.
Want to reduce stress and make money? Start planning your exit.
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