Successful exit strategy requires plan

As I have worked with entrepreneurs on meeting their goals and especially when they are trying to sell their businesses, it becomes painfully obvious that most have no idea about how they want to exit their business. Some refer to their business as their baby, others as a monster. And as is the case with children, both are true at the same time.

One thing that is universally common is that their businesses consume them. They work way too hard in their business. As a result, they tend not to look ahead and plan for the exit.

One of the “7 Habits of Highly Effective People” that Stephen Covey made famous was “Begin with the End in Mind!” This great advice counsels people to look to the outcome and prepare and operate toward that desired goal. This is great advice in business as well.

Recently, I spent some time with an entrepreneur who was planning on how she was going to start a new business.

As we reviewed her business plan, I was shocked and pleased to find that a major section of the plan was “Exit Strategy.” She had already considered who would be most likely interested in her business venture, what their perspective would be on the business and how she would grow the business in a way to make it most appealing to these potential buyers. Because of this vision, she tailored much of the rest of the plan to make the business the most profitable and appealing to the perspective buyers as she could.

This focus of determining what your exit looks like long before the actual event is even anticipated is a great way to improve your company’s value and the way it operates. As indicated above, most owners who are also employees of their business get lost in working in the business and often lose focus on working on their business.

When owners take the opportunity to step away from the day-to-day operations and get above the noise and confusion of the daily business, they will often be surprised by the lack of focus and direction of their business. They allow circumstances to bend them and direct them to the apparent exigencies of the moment. When there is no clear destination, the only point of reference is from within the boat, and so no consistent heading is possible. When owners take time to map out their exit plan and then periodically plot their course in relation to current activities, they will have a consistent progression that will allow for maximum value at the time of exit.

The map referred to would be the Exit Plan. To be effective, your exit plan must include these six essential components:

1) It should include a concise statement of your business goals, personal goals and family/estate goals. This step is essential to ensure that all of the goals are consistent and set the direction for the rest of the analysis. It should include a comprehensive analysis of financial lifestyle requirements, needs and wants.

2) An exit plan should contain a detailed business valuation to establish a baseline value for the business. This baseline will be used to measure if a sale will meet the needs documented in No. 1 above and provide a baseline to measure the success and viability of the other steps.

3) The plan should help you identify specific ways to enhance the value of the business before your exit.

4) A good plan should contain an analysis of the pros and cons of your different exit alternatives such as a third-party sale, management buyout, family succession or liquidation.

5) A good plan should provide suggestions to minimize any capital gains, ordinary income and estate taxes related to the exit.

6) The analysis should contain an action plan that details the specific personal and business steps you must take to prepare for your exit.

Perhaps the most important thing to remember is that developing a good exit plan is a multidisciplinary endeavor. No single professional adviser has all of the expertise needed to design a comprehensive, integrated exit plan. The best exit plans incorporate input from a team of advisers that includes:

▶ A business attorney with M&A experience.

▶ A financial adviser or wealth management professional who does planning work.

▶ A tax specialist who is versed in the latest tax issues.

▶ An insurance professional.

▶ An investment banking firm that specializes in exit planning.

By establishing an Exit Plan, you define your destination. When you work with “the End in Mind,” you will be able to move forward consistently and measurably towards that elusive “Successful Business Transition.”

Leland Pace is a partner at Stewart, Archibald and Barney in Las Vegas. He specializes is business consulting, succession planning and exit strategies.

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