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How to Plan an Exit from Your Business

Written By: John Leonetti

If you are like most business owners, you have devoted an immeasurable amount of work and resources into growing your company. With all that you have invested, doesn’t it make sense to plan an exit from that business that will protect the wealth inside of it?  After all, exiting your business will certainly be one of the most important financial events of your life. The key is to understand that an exit is not simply the sale of your business. Rather, it is a process that may occur over many years and selling your business is just one of many options available to you. Designing your exit strategy will take time, planning, and forethought but will allow you to reap the greatest reward for your years of hard work.

Most often, the majority of an owner’s wealth is tied to their privately held business. In addition, most owners depend upon that business for income, perks, and for the overall maintenance of their lifestyle. How then does one harness that accumulated and illiquid business wealth while minimizing the taxes and fees you will need to pay? The answer - you achieve this through planning.

An Exit Plan outlines the succession of your business’s ownership and control taking into account all business and personal factors. The time period for the Exit Plan must accommodate the business, your desired time-frame and include a plan to develop or identify potential successors and/or buyers. In order to be successful, the plan needs to be centered around your unique vision for your business as well as your life after the exit.

How do you prepare for your exit?
The process of creating an exit plan begins with two questions, “Are you financially ready to leave?” and “Are you mentally ready to leave?” Know that they may not have the same answer and, even if that answer is no, it certainly does not mean you should not be planning for your exit. To prepare financially you need to accurately assess how much money you will need to maintain your lifestyle. This entails understanding your dependency on your business not only for income, but for benefits such as car payments, health insurance, and other lifestyle expenses. Determining what you need versus what you have will help you choose an exit option that can bridge that financial gap.

The mental preparation may be harder than you expect. Exiting a business that has been built by years of hard work and dedication can be a difficult emotional hurdle. Begin by answering these questions:

  • How involved are you in the day to day operations of your business?
  • What will you do with your time when you are no longer running the business?
  • Do you view your business as a ‘job’ or as an ‘investment’?

Simply taking the time to answer these questions is the first step in mentally preparing yourself for your exit. This process, if given the proper amount of attention, will allow you to overcome any psychological barriers that can prohibit you from properly planning for your exit. Being prepared will allow you to think clearly throughout the exit process so that the decisions you make are based on objective criteria instead of the subjective way in which you feel about the exit. These are challenging issues for every owner of a privately-held business. The sooner that you begin to address your ‘readiness’ for an exit, the better prepared you will be.

Next, what are your exit options?
The most obvious exit solution is the sale of your business to another buyer, perhaps someone in your industry. It is helpful to know that only a small percentage of businesses, less than 20%, successfully sell to an outside buyer. The less obvious, and much more frequent, exit strategies include transfers to family member, to management teams, to private equity groups, or to employee stock ownership plans (ESOPs) as well as gifting programs. Each option offers benefits as well as consequences and some may be better suited to your Exit Plan better than others.  It is your responsibility to learn about the pros and cons of these different options and apply them to the personal goals that you set for your exit. By simply knowing that a variety of exit options exist, you raise your understanding and the potential of creating an exit plan that suits your needs.

In order to take the final step in the exit planning process, you will need to understand some of the technical components such as taxes and deal structures so that you can measure the net results of your exit.

How do you execute your plan and protect your wealth?
The process of exiting a business is complex. To execute the plan it is vital that you gain the support of advisors who will help you though the process of protecting your wealth while minimizing taxes. How a transaction is characterized for tax purposes determines how it is taxed. Tax characterizations are tied to how transactions are structured. It is then critical that you determine the actual financial outcome of your Exit Plan. Once you have, you and your team can determine if there are any ways to change to structure of the exit to improve your tax situation and, if so, to see if the buyer or successor will accept that change. This is not the only step to protecting your wealth. Unfortunately, many business owners do not consider the estate tax consequences of their business success. By not including your business in your larger estate planning objectives, you may compromise its succession and survival. To help you navigate this part of the journey you should consider an advisory team that may include an; attorney, accountant, financial advisor, insurance advisor, mergers and acquisitions advisor, as well as a valuation advisor.

So, there are basically three stages to the exit. 

  • First, you set your goals by understanding your readiness for an exit and your vision for what you want your business and post-exit life to become.
  • Next, you outline your exit options and determine which is best suited to your situation and plan.
  • Finally, you assemble your team of advisors to assist you in understanding the technical aspects of the exit along with how to execute each phase of the plan.

You have built a successful business and for that you should be congratulated. I caution you against thinking that you can simply find your way through the exiting stage of your business alone, it is without question one of the most difficult and complex stages. Without proper planning, consideration, and advice you can too easily give away hard earned assets. Instead, by creating an Exit Plan you can customize your exit over a period of time to accommodate the next phase of your life and simultaneously protect your wealth. Remember that this is your plan and it is unique to you, your goals, and your readiness for that exit. Once you know the exit options for your business and the value of each, your strategy will hopefully become clear to you. In the end you will not only have a plan to exit your business, you will have the confidence that you have protected the wealth that you have worked so hard to create.

About the Author:  John M. Leonetti, Esq., CFP®, CM&AA, is the founder and managing director of Pinnacle Equity Solutions, an exit strategy planning firm which offers planning services to business owners as well as education and training programs for professional advisors.  He is the author of the new book, EXITING YOUR BUSINESS, PROTECTING YOUR WEALTH (Wiley/October 2008).

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