I have an estate plan.  Why do I need an exit plan?  An estate plan is just one important segment of a comprehensive exit plan.  A well designed and implemented exit plan is a powerful and valuable business and personal planning tool.  It represents the roadmap a business owner should follow as he/she prepares to exit the business.  Exit planning puts a business owner in charge of his/her legacy.  Leaving the legacy you want is an entrepreneur’s final test.  An owner’s legacy is the achievement of all his/her personal, business, financial, family, retirement, charitable and community involvement goals.  Properly approached, an exit plan helps the owner define and successfully execute all of these goals.

I plan to transition my business to my kids.  Why do I need an exit plan?  Most business owners want to transfer ownership of their businesses to their children.  The reality is most never do because of a conflict between the owner’s and children’s goals.  Another reason owners frequently do not transfer their businesses to their children is because doing so does not support their own financial goals.  Unfortunately, this reality does not usually become apparent until the owner is about to retire.  Because a sale to a third party was not considered, strategies and action steps to properly position the business for sale are not deployed.  Having developed an exit plan early-on, the owners would have realized the incompatibility of transitioning the business to his/her children and would have pursued a course to maximize value in anticipation of a sale to management, employees (ESOP) or a third party. 

Ideally, how far in advance of the date I want to retire from my business should I start the exit planning process?  We suggest if possible that the exit planning process start at least three years before the owner wants to exit from his/her business.  The following is an example of an exit timetable:

 *Most buyers of private companies want the active former business owners to assist the new owners for a period of 1 to 2 years.

At a minimum, a business owner who wanted to be free and clear of any responsibilities to his/her business by Dec. 31, 2010 should have started the exit planning process in mid 2007.

What type of expertise should your exit planning advisor have?  Because of the complexity of the exit planning process, no one advisor has all the requisite knowledge to effectively advise a business owner.  The exit planning process requires knowledge of estate planning, business law, mergers and acquisitions, tax law, insurance products, financial planning, wealth management and operations enhancement.  We therefore recommend a multidisciplinary core team approach to the exit planning process.  The team should consist of a merger & acquisition advisor with exit planning experience, attorney with estate and transactional experience, a tax professional and a financial planner / wealth manager.  One of the team members takes on the responsibility of leading the exit planning team.

The exit planning process indicates I need to increase the value of my company in order to support my retirement spending goals.  Is increasing my company’s profits the only way to increase the value of my company?  While increasing earnings is important, focus during the exit planning process should also be placed on positioning the company to be an above average industry performer and reducing risks.  Above average industry performers typically receive above average industry valuations.  The higher the risks as perceived by a buyer, the higher the rate of return the buyer will require on its investment.  This will require the buyer to offer the business owner a lower valuation multiple which translates to a lower price.

Bill Quish, CEPA, Senior Managing Director at Lyons Solutions, LLC