Exit Planning: The
Side of the Equation
[fname], when getting ready to exit your business, it is important to set
a plan. One of the most valuable insights into designing an exit is to
remember that the skills that you used to build a successful business are
not perfectly transferable and useful for designing your exit. From this bit
of wisdom comes the quick conclusion that you need to think differently in
order to form and execute your business exit. The following bullet points
address the general business areas that you should be considering for
your business exit.
Who will take over the business?
Do you know who you want to run your business after you? This question is
easier asked than answered. You see most owners have not given due
consideration to the pros and cons of each potential future owner for their
business. For example, an outside company can provide money and management
skills to help run your enterprise into the future. If you don't need either
of those, you may consider a management buyout. Or, if you want a partial
exit, keeping control of your business, you may choose an ESOP. Or there may
be a combination of these strategies to assist with your planning. Let's
examine each of them.
Know your Exit Options –
External Transfers versus Internal Transfers
Transfer to outsiders
If you envision selling your business to a competitor or to a financial or
equity group, you need to look at your business the way that they would see
it. What are your value drivers? Are you the primary asset or can the
business run without you? What resources are available to sustain your
business in your absence? Do you have protected and unique property that can
be acquired in the transaction?
If you can ask these questions and envision a future sale, than you can also
ask the next series of questions to validate your notion of selling to an
outsider. Are you very concerned about the future of your managers and
employees? Remember that a sale of your business means to sale of control to
an outsider. Many owners get stuck here as they feel responsible for
employees and family.
Do you have family in the business who may not remain employed? Are you
concerned about your business legacy and its impact in the hands of an
outside owner? Are you aware of fees and taxes that you would pay in an
Answering these questions will assist you in understanding whether you are
candidate for an 'external' transfer.
Transfer to insiders
If a transfer of your business to an outsider does not feel like the best
course of action, you can look to internal transfers to meet you goals.
Employee Stock Ownership Plans (ESOPs) and Management Buyouts are two ways
in which you can convert your illiquid business into cash. Each exit option
has its pros and cons. You should first reflect on the answers above and
then determine whether or not your staff can lead your company in the
future. This approach will get you closer to the exit path that is
appropriate for your business.
How will revenues and profitability be
sustained – are you a bottleneck in your business?
Be honest with yourself as to how vital you are to your continued,
profitable operations. Many owners underestimate what they do and what they
represent for their businesses. Employees and managers will almost always
defer to your expertise before making important decisions on their own. They
are usually not incentivized or empowered to do otherwise.
Here is a good litmus test: can you take a three (3) week vacation, without
checking-in with your business, and have it run smoothly without you? If the
answer is 'no', begin to examine which parts of your role in the business
are most transferable to someone else. Then ask the question again to see if
your business is more sustainable with your improved procedures.
What you will likely find is that exiting is as much about 'letting go' of
control as it is about structuring a transaction. You have developed a close
working relationship with those around you. Engage in some exercises that
help you objectively evaluate your team's ability to run the business
without you. Eventually you will no longer be running your business. Take a
pro-active approach to this contingency by making these evaluations today.
How is your management team aligned?
It is likely that your management team is not aligned with your exit goals.
You may have been relying on someone who cannot fill your shoes. Or you may
have one or more managers with strengths in certain areas, but fatal
weaknesses in others. Take the time to organize your managers and to put in
place an incentive program that not only focuses them on profitability, but
also focuses them on management and leadership within your business.
Remember that one day your guidance will not be available to your managers.
Tools such as financial incentives help to begin and/or facilitate the
Aligning your management team
One tactical strategy that you can employ is to shift bonus dollars that are
paid in 'cash' to 'deferred & contingent' payouts (similar to the way that
vesting schedules may exist in your retirement plans). Today's economy has
provided an opportunity to re-evaluate your manager's compensation and to
restructure the manner in which it is paid out to them. Remember, these
strategies are not about increasing your bottom line, but more focused on
getting the buy-in from your managers on their interest in taking enhanced
roles within your organization.
Financial statements & operations
If you have been remiss in 'cleaning up' your income statements, now is the
time. Begin to critically evaluate the personal expenses that you 'run
through' your business, as well as your 'excess compensation', discretionary
contributions, and your other perks. Remember that each of these items
impacts your cash flow. Even though you may have employed these strategies
to minimize your taxes, you want to be able to demonstrate to your future
owner(s) your company's true potential for generating free cash flow.
Organizing your advisory team
You have likely built a successful business by relying upon the expertise of
others. Now is the time to assemble your business (and personal) advisors to
convey to them your intention to execute a successful exit in the future.
The insights that each of your advisors will provide to you will help you in
addressing many of the following areas:
> Taxes that you may owe for different
> Legal agreements that you may need to
> Capital that you may need to attract
> Cash flow projections that you may
need to provide to successor owners
> Insurances that you may need to
purchase to protect your wealth
Remember that each of these different business issues is a specialty unto
itself. The sooner you can begin to gather and organize these various parts
of your business exit, the faster you will be able to move forward with your
No exit is easy. The myth that business owners simply decide to exit one day
and sell the next is simply just that – a myth. Every owner struggles with
finding the right exit path and developing the proper plan. By thinking in
new ways and gathering key pieces of information, you can align your
resources and assemble.
As always if you need some advice, you're
welcome to email me of call me here at the office at 281-993-4530.
Charles Wilson, CPA/CFF, CGMA, CBEC
Charles Wilson, LLC
307 S. Friendswood Dr, Ste B-2
Friendswood, TX 77546
Charles Wilson, CPA/CFF,
CGMA, CBEC is a Certified Business Exit Consultant and is affiliated with
Pinnacle Equity Solutions, Inc., an Exit Strategies Training and Solutions
company. Parts of the content in this email are taken from previous
Pinnacle Equity Solutions, Inc's. newsletter library and website in
accordance with Charles Wilson's certification in Pinnacle's Certification
and Membership Program. All Copyrights are the properties of Pinnacle Equity
Solutions, Inc. and Charles Wilson, LLC and their respective owners.