David Tobin is the founder and general partner of TobinLeffa consultancy for M&A advice and exit planning.
If you ask a group of entrepreneurs for a show of hands who care about an exit plan, everyone’s hand goes up. But if you ask the same group what an exit plan is, almost everyone will look at you blankly. Most owners don’t know. So, what is an exit plan, and why will having one usually increase your net worth when it comes time for your exit payout day?
What is an exit plan?
An exit plan is a blueprint of how to turn business value into personal wealth – how to move into the next chapter of your life with confidence, knowing there is a plan to transfer ownership on your terms and time frame. Here are some of the strategic questions that a well-thought-out plan should answer:
• What are the goals, wishes and intentions of the stakeholders?
• What is the company’s valuation today and what might it be worth when it comes time to sell?
• What can be done to increase the company’s value and prepare for a smooth transition?
• What are the feasible exit routes: selling to a strategic buyer/financial buyer/management team/family members; form an ESOP; maintain control and set incentives for others to run the business, etc.
• Are you open to deal structures that allow for “two bites to the apple” (two liquidity events) or do you want to divest completely?
• What can be done to reduce income and estate taxes?
• What is your “number” (the amount you need to close the deal)? Will that amount help you live your desired lifestyle?
The process of developing the plan is more important than the final product. When done properly, the planning process will help you answer the questions above, expand your view of possibilities, build a feasible game plan, and increase your wealth. Putting an exit plan into action usually involves four phases. Here are many of the elements of each stage.
1. Seeking souls
For most business owners, when to sell and who to sell to are important decisions. Transferring ownership of a close-knit business can affect many people, including family members, employees, suppliers and the local community. The exit planning process must continuously clarify the goals, wishes and intentions of the stakeholders. It should crystallize the owner’s vision of the business, their desired involvement during the transition, and the leadership of the business going forward.
2. Assessment and planning
To help owners make decisions, the exit planning process should include an assessment of the business and its opportunities. The current market valuation for the company needs to be estimated for different types of transactions and buyers. The selling price for a sale to a strategic buyer may differ from the price for a financial buyer. If selling to employees or relatives is an option, the valuation may be different from selling to a third party because synergistic savings and cross-selling opportunities may not exist with an internal transfer.
The company’s value drivers should be evaluated to highlight strengths and opportunities and identify potential weaknesses and threats that will inevitably emerge during the sales and due diligence processes. Examples of value drivers include the company’s unique sales proposition, customer concentration risk, profit margins, senior management team experience and growth.
Different exit routes need to be evaluated. Perhaps the company is large enough to justify a potential private equity group or family office investment that would provide the opportunity for two liquidity events. Perhaps forming an ESOP trust is the best fit for the owner. Or maybe keeping control and setting incentives for others to run the business is the best option for a few years. There can be many possible ways to monetize business interests.
During the development phase, the timetable and benchmarks of the plan are outlined. These plans should be executed while the business and opportunities are being assessed, but finalized afterwards, as the choice of exit path and estimated sale price will influence the members of the advisory team. If the likely path is a sale to a third party, the services of an investment banker or broker are needed. If the transition to family members occurs, the assistance of a family business coach may be required. The advisory team will most likely include a business planning or transaction attorney, a CPA, and the owner’s financial planner.
The size of the transaction may be a reason to align the exit plan with the owner’s estate plan. In addition, business continuity plans must be reviewed or developed with respect to the exit plan to help protect against unforeseen events such as the death or disability of a stakeholder. Establish a plan B, such as attracting an investor, forming an ESOP, or maintaining control, to approach the primary exit path from a strong position.
The objectives and the timetable influence the implementation of the plan. Many exit plans can take years to implement value-enhancing strategies and/or prepare successors. Because the advisory team can include multiple players, especially if the exit plan integrates with an estate plan or financial plan, it’s important that someone be the “quarterback” to develop action plans and assign responsibilities and deadlines. The team should regularly meet with stakeholders to clarify or refine objectives and keep the plan on track.
Developing and executing an exit plan sounds like a lot of work, and it can be. However, you can only sell any business you own once, so developing a plan is essential to give you more money for your investment and hard work. The planning process should be fun and energetic while providing peace of mind.