Author: Michael J. Reynolds, CPA, CEPA
If you’re a business owner, one of your most valuable assets is your business.
It is also probably true that you devote a lot of time and thought to managing and growing your company and much less time imagining your company if you are not part of it. Have you ever asked yourself:
- What will happen to my business if I am no longer able to run it – for example, if I suddenly become too ill to run the business?
- When am I planning to step down to let the next generation of my family take over my business, and is the next generation ready to do so? Do I have family who are willing to take over the family business and do they have had the proper training and experience to do so?
- Who would assume the responsibility that I have to my customers and employees if suddenly I were unable to work?
Questions like these point out the importance of having a written Exit Plan. Around 50% of all exits from business are not voluntary due to the 4 Ds: – Death, Disability, Divorce and Distress. This is what makes Exit Planning one of the most crucial planning objectives for any business. The notion of an owner leaving a business can be an uncomfortable thought. Some will think that their businesses could not possibly be successful without their presence. They may think that they are in good health and are impervious to illness. Others will believe that the best course of action would be to just close the doors and ride off into the sunset.
There are many exit options available, but over 2/3 of business owners are not familiar with their exit options. According to the Exit Planning Institute’s State of Owner Readiness Survey in 2013, in total 83% of business owners have no written transition plan; 49% have done no planning at all!
The concept of Exit Planning and the creation of the designation of Certified Exit Planning Advisor (CEPA) grew out of the need for business owners to plan for the future and to know what to expect after the transition. In many instances , former owners may not have realized the profit that they had hoped for when they sold their businesses. According to a Price Waterhouse Cooper poll, 3 out of 4 business owners later regretted selling their business. Often, families have been exposed to the monumental undertaking of sorting out the final affairs of a business when the owner has suddenly died. The failure to plan can be a terrible burden for those that are left behind.
If you are a business owner, I ask you to ponder the following items and truthfully consider each one to see if you have put enough thought into your exit strategy. You owe it to yourself and your family to take Exit Planning seriously so that when the time comes you can exit your business without any regrets.
The following are ten criteria that indicate that you are “prepared” or “ready” to transition your business:
- You have spent some time and money getting educated on the process of how to transition your business. You have discussed transitioning with your loved ones.
- Your personal, financial and business goals are aligned. They should be defined, co-dependent, and linked.
- You have created an advisory team which includes, at minimum: an attorney, CPA, wealth or financial advisor, exit advisor and spouse or partner or other family member who is a “significant other” in your life. Other advisors who may be included are personal friends and advisors, banking advisor, M&A attorney, estate planning attorney, real estate attorney, business attorney, ESOP specialist, tax specialist, insurance specialist, foundation / charity, key employees, investment banker or business broker, board members, and family or personal counselor.
- You have created a contingency plan which includes buy-sell instructions and appropriate insurance. It should specify what should happen if, before your planned transition, something were to happen outside of your control that would prevent you from operating your business or force you to transition unwillingly. You have reviewed this plan with your trusted advisors including family members and/or partners, if applicable.
- You have a completed a strategic analysis; business valuation; and personal, financial, and business assessment(s) within the last year.
- You have considered all your exit options and optimum deal structure and weighed the pros and cons of each in relation to your stated goals and objectives.
- Your transition plan is written and includes: goals and objectives, clearly defined tasks and accountabilities, definition of your transition team, definition of your transition process, a plan leader or project manager, timelines, a budget, and your role before and after transition. This plan ideally has a multi-year implementation timeline.
- You have considered and designed a post-business life-after plan. This plan is linked to or part of your wealth management plan which has been prepared by a professional financial advisor and, if applicable, estate planning attorney, insurance specialist, tax specialist and charitable foundation specialist.
- You have a pre-transition value enhancement / preliminary due diligence project underway to de-risk the business, maximize its value, minimize taxes upon transition and improve the probability of a smooth transition to the next owner(s). Family transitions should be treated no differently than other transition options. This plan ideally has a multi-year implementation timeline.
- You have a management program underway to ensure the post-transition leadership is prepared to operate the company after you exit, and you have secured the appropriate specialists to handle your desired transition option.
Please contact me with questions and let our firm be of assistance in helping you explore and plan your exit options.