An Exit Planning Financial Snapshot / by Kerri
There are many aspects to exit planning that business owners take for granted, never think about, or abdicate to others. This naiveté is one of the biggest roadblocks to getting out on terms that give you the full value of the business. This scope of this book is broader, more all encompassing than just the finances of the exit transaction. You can find experts and financial models to help with the exit transaction in financial terms and you will need them.
To tame the numbers beast before you get there and make it absolutely manageable for any business owner, here are six core elements to consider on the financial side of exit planning:
- Setting Financial Goals
Your long-term income needs and the financial requirements of your reinvention (new venture, avocation, adventure, hobby). From these financial requirements, you can determine the sale price and terms you want your business to deliver when you exit. Initially, these two numbers may not match up. That’s just one good reason to start planning early.
- Current Value of the Business
To be buyer ready, you should always know the current value of your business. You won’t be disappointed by a buyer’s offer if you know the current fair market value of your business. Valuation experts analyze the business books and other materials and compare its profits and losses to relevant businesses in your region and/or industry. With the current competitive value in mind, you can track your timeline to exit on your terms and meet your financial goals.
- Build Business Value
To exit early and maximize the value you walk away with, it is imperative to always be building business value. If you are always adding value, accelerating growth and making the business more buyer attractive, you will have the opportunity to exit with the financial freedom for your reinvention. If you have not been building value all along, start now so that you can sell the business for what you know it’s worth and meet your long-term financial goals.
- Selling a Business
Selling a business has many parallels to selling a house. Once you decide to sell and the business is buyer ready, it can still take 6 months to 2 years to close a transaction. Before you must sell (for any reason), consider all your exit options, all possible buyers and the impact of each option on your exit, on the future of the business and the future employment of your team with the business. Before you choose a specific option, also investigate the tax impact on you and the business. The tradeoffs can be severe.
- Contingency Plans
Murphy’s Law – if something can go wrong, it will. The same is true for your business, as well as your exit from the business. Knowing this up front, is another incentive to start early and aim for an early exit. You want to build a contingency plan for the business in case of any crisis or emergency. For example: you need an emergency plan documented with a copy kept totally offsite – if for any reason you can’t get into your offices, you lose power and can’t access computers or passwords, there’s a fire/blizzard/hurricane that destroys your business, etc. Plans like these and plans for other types of unexpected situations should be built right into your business exit plan from the outset. You also need a documented contingency plan in case you, the owner/CEO, become physically or mentally disabled, have a heart attack/stroke and are laid up for six months or even worse, if you should die. Additionally, your contingency plan must include all current buy-sell agreements, services, resources, client orders, employee contracts, key employee incentive programs, business/disability/life insurance policies that are in effect.
- Life and Legacy Beyond Business
With your comprehensive business exit plan and strategic contingency plan in place, you can explore and consider options for reinvention alongside your estate planning goals to leave a legacy and secure your dynasty. Much of your financial independence beyond the business as well as your estate planning are tied to the sale of the business (aka a liquidity event). You have more estate planning options, more tax advantaged options and more ways to maintain the owner benefits you enjoy; if you start this planning early – ideally, five years before you can fund those options at your exit.
Your financial position, holdings, and control over the business and those holdings, will change drastically and instantly once you sell the business. Therefore, you must revisit your personal financial plan and your estate plan at each business milestone of the exit process. As you make choices for exit options and reinvention opportunities you want to pursue, be sure to circle round to be sure they still coincide with your business exit and contingency plans.
Stating the obvious, this is not a complete discussion of the financial aspects of exiting your business. It does however give you a general outline of the scope of the financial issues to address with various key experts on your team. Just on the financial side, you can begin to see the value of starting now, planning early and preparing to maximize the value of your business when you want to get out.