Posts tagged with: early exit planning
Business owners get lots of support, training, and direction on starting and growing their business. They engage a business attorney and an accountant from the outset. Along the way, they may hear a question or suggestion about how they will cash out the business they built.
But the idea that exit planning and the lead-time to maximize the value of their business could take years is unfathomable for most owners in the lower middle market.
It’s unfathomable, because:
- No one told them how long the process takes, the range of advisors they and their buyer will call in to assess the sale-ability of their ‘baby’, or its value.
- No one prepared them for the gauntlet of demands in the transaction process
- They never knew they’d have to reveal so much about the inner workings of their business – their secret sauce, as well as their personal takings from the business.
- The [costly] expenses they have avoided along the way are now mandatory to demonstrate the business is a turn-key operation that can run successfully under new ownership
- They did not need all these different experts while running the business, why should they need any more help to sell the business, after all it’s it as simple and straight-forward as selling a house isn’t it?
- They’ve been operating the business successfully for decades, generating a healthy income and lifestyle, so why would anything need to change for someone else to buy them out?
The shock of what that valuation could look like if they fast-track a transaction process, vs. the potentially greater valuation if they extend planning time, (to better prepare the business from a few weeks to even a few years), can put a big wrinkle in their retirement plans.
Just a few of the incentives of extended exit planning:
- Better prepared companies command higher valuations and higher multiples
- Extended Lead-time can showcase increased growth, reduced risk, improved quality of operations, stronger forecasts, etc.
- A Planning Phase of 3-5 years gives an owner time to prepare:
- The business
- Financials [personal and business]
- Owner’s future plans
- Reduce advisor and transaction costs
- Leverage the business to the strongest terms in the seller’s interest
- Ensure the owner gets a successful transaction the first time
- Clarify, address and focus the owner on their reinvention
Without an exit plan as a framework for every decision you make, owners end up working harder, not smarter for the lifetime of their business. Starting years before an intended exit date to prepare and plan for your ideal transaction and transition will position you, the owner to:
- Increase business value to increase transaction value
- Reduce risk
- Command higher multiples
- Grow revenues and profit margins
- Make the business buyer ready and buyer attractive
- Minimize the tax burden you will incur
- Plan and test your reinvention
- Ensure you don’t sabotage the deal once it’s made
- Surround yourself with an all-star team of advisors
Transaction Value increases with the length of time invested in early exit planning.
Most business owners have not put a lot of thought into planning for their eventual exit from their business. Many many owners, of established as well as startup companies, don’t see any value in planning for an exit that is years if not decades into the future. If they can’t see immediate benefits and consequences for their actions and decisions, they leave it for ‘someday’.
You may not need an exit strategy if you intend to die at your desk and leave a mess for your family and team to clean up.
So let’s suppose. Do the following points describe you?
You Don’t Need an Exit Strategy IF You:
- Want to liquidate your business upon closing even if it means getting only pennies on the dollar
- Want to maximize your tax bill to the state and Uncle Sam, minimizing the return to your family
- Do get to sell in the end (maybe a firesale) and you enjoy paying your technical/transaction advisors at their highest premium fees
- Are willing to walk away from 30-50% of the value of your business
- Are willing to let the business lose clients when you depart
- Don’t feel responsible for your employees after you’re gone. Will they still have a job, will they move, will they have to take a pay cut?
- You and your business are not a community partner, in donations, sponsorships or time, and your closing will not hurt the community
You Don’t Need an Exit Strategy IF Your Family, Your Spouse, or Your Children:
- Can and will jump in and run the business your way, without any need for some development and succession planning in advance
- Can salvage or sell the business on their own while you are indisposed
- Do not need or expect the business to be liquidated in some way to secure their future
- Do not expect or deserve a return for all the sacrifices they made for you to build that business
These statements are a bit exaggerated. ‘Yes, But my situation is different…’ is not enough. Without a Framework for your exit; you, the business, your team, your family, your finances and your future will all be shortchanged. Is that your intention? Is that your plan?
- Everyone needs a Master Plan – for their business and their life
- Every owner needs contingency planning – ideally before you opened the doors to your business – sooner rather than too late
- Every owner needs to start exit planning early – years earlier than any transaction advisor every required of you
- Exit planning and execution take time and a team to maximize your return and optimize your exit transition
If not now, when?
Call us for your free consultation.
Lower middle market business owners risk the future success and likely demise of their business (90% walk away with nothing*). All because no one told them early exit planning is a better way to control the outcome and maintain more leverage in any transaction negotiation. The mistakes owners make when they delay exit planning are often very costly and sometimes irrecoverable.
Baker’s Dozen Mistakes
Here are 13 mistakes owners of private and family run businesses frequently make. They:
- Never align personal, financial, business, family, reinvention and exit objectives. When your objectives pull you in opposite or competing directions, indecision keeps you paralyzed.
- Misjudge their company’s true, transferrable value in the market place. Almost every business owner undervalues or overvalues their business to a potential buyer (financial or strategic).
- Avoid establishing an “Owner’s” Estate Plan. Putting an estate plan in place does not mean you will expire in the next 60 days. Rather it ensures your plans and intentions for the business survival, your team and your family are secure; regardless of what may happen to you someday.
- Neglect claiming and protecting all the intellectual property they have built up in their business. As a result, they leave the business and themselves vulnerable to unnecessary risks and lawsuit losses.
- Start and run their business long-term without any contingency plans in place to protect them and the business from partner disputes or ownership challenges.
- Use the business coffers as their own ATM, so there is no residual value in the business to attract new owners.
- Enjoy a lifestyle funded by the business which cannot be maintained when they sell the business. Their exit options and returns are limited by their personal or family wealth mismanagement.
- Resist marketplace changes and become rigid in their business model missing a market shift or new opportunities.
- Give up on finding or grooming a capable successor. Developing successors takes time, training, delegating and finally relinquishing control.
- Never prepare the company to be ready to transfer ownership.
- Claim excessive tax costs preclude planning for an exit, when the opposite is true. With early exit planning, owners can drastically minimize the tax impact of any transaction down to single digits.
- Postpone considering all exit options until it’s too late to execute most of those options and their choice is being dictated by time, health or other critical game-changing issue.
- Pursue the wrong exit option in the last 6-9 months. As a result, they run out of time, cashflow and opportunities to close an ideal deal to meet their exit criteria.
Now you know so you can avoid each one.
If you need help assessing your business or fixing these mistakes to put your business on a stronger path with early exit planning, call us at 508.820.3322 or email us.
If You Desire to Ever Sell, Scale or
Pass on Your Business for $10M+
You Can’t Afford to Wait.
You Need This Roadmap Now
November 6, 2014
This Way Out Group is offering a full-day interactive and practical session on building value in your business and a timeline of available exit options and strategies.
This 8 Figure Valuation Roadmap with Kerri Salls offers you a confidential personal assessment of your business’ value drivers relative to other companies. In addition, this one-day transformation immersion will give you insight, perspective, tools and a roadmap to:
- accelerate growth and
- maximize the value of your business now.
A limited number of Scholarship Discount Tickets are available until September 21.
See the Registration page for details.
VIP Master Pass Tickets offer extensive services and assets before, during and after the event.
Check out the Registration page now for details.
- Starting, growing, adding value and exit planning are an integrated continuum – all are essential to maximize value and monetize your business.
- You can better position your business for amazing growth and increasing value if you start with a plan
- An action plan that adds value to your business immediately and prepares you and your business to attract the highest valuation opportunities
- The roadmap to drive the process to a transaction to guarantee your transition to reinvention
- Identifying, communicating and testing your reinvention plans. Ensuring that your next venture, adventure, avocation or opportunity is even more engaging, compelling and fun than the business you let go
Along the way, we’ll address:
- Hard skills to maximize value and wealth
- Soft skills and expertise to monetize every asset
- Your Next Steps
The 8 Figure Valuation Roadmap is a fit if you are the Owner/CEO/President/Founder of businesses with current revenues up to $30M.
Whether you plan to monetize your business in the next 3-5 years or not for another 3 decades, this program is essential, now. Even if you only have an inkling of what that future looks like, you need this immersion training now.
This program is not suitable for experts, advisors or other company officers.
Seating is limited. Register early for Thursday, November 6, 2014.
Why This Seminar?
To guarantee you can cash out of your business
to cash in on that life beyond your business,
because of the value you can prove is in your business.
It’s Never Too Early Or Too Late To Plan Your Exit Strategy
Early exit planning is essential for every business. On my radio show, Exit This Way, I open every show with the statement:
“It’s never too early or too late to plan your exit.”
Attorneys, wealth advisors, tax advisors and others all encourage early exit planning for business owners to minimize taxes; and to set up a variety of trusts to help you continue to control your company and its assets, while offering full protection for the business and your estate.
Paradox of Business Ownership
Don Brown, Vice President and Senior Relationship Manager at KeyBank opened his article, Smart exit strategies begin with early planning in the Kitsap Peninsula Business Journal by stating:
“What [most business owners] often fail to see and plan for is the byproduct of that success — that someday they will want or need to move beyond what they’ve worked so hard to build.”
That’s the crux of the paradox of business ownership.
There is a difference between exit planning and succession planning, but they must be addressed together because the decisions and outcome of both are intertwined.
I hear it many times a week: “I’ll walk away from my business when I’m ready to walk away. . . .” However, to successfully walk away when you are ready to walk away, doesn’t come together because you say so. There are many factors to consider, decide and prepare. The more prepared you are, the more control you have of timing, valuation, ownership, legacy; along with financial protection for you, the business and your estate. The earlier you start that planning, the more secure you can be that all the pieces are aligned and integrated to achieve your objectives.
Deciding when to exit, never mind which exit option you want to pursue, is non-trivial. The learning curve and execution of that decision is time-consuming for you the owner as well as your team of advisors.
Succession planning and exit strategy planning can be a distraction from running the day-to-day operation of your business. When you start early, you have control and flexibility to explore options and leverage your advisors to optimize your outcome. Consult your All-Star Team of Advisors early and often.
The risk of waiting until too late (and then needing to act fast because of health, business cycles, market conditions, business or family issues) is that you may leave up to 50% of the value of your business on the table, and share a greater portion of the proceeds with ‘Uncle Sam’. With good planning, that doesn’t have to be you.
Orchestrate Your Exit
As Don says: “a well-developed exit strategy is carefully connected to your overall business strategy.”
That’s why at This Way Out Group, we provide a Four Step Exit Strategy Framework™ to tie every strategic decision in the business, short-term and long-term, to your exit and succession strategy.
In parallel, your estate plan and exit strategy must be integrated to work in concert with each other. It takes a team approach to orchestrate how these different pieces work together. At This Way Out Group, we facilitate that team to cooperate, coordinate and collaborate in your best interest. Contact us to see how early exit planning can help you.