Finance March 15, 2013 Last updated September 18th, 2018 1,483 Reads share

How To Avoid Losing Your Shirt Through Strategic Business Exit Planning

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Are you putting your retirement, your peace of mind and most of your net worth at risk by failing to develop an exit plan for your business? Sadly, if this describes you, you’re not alone.

Surveys by the Exit Planning Institute indicate that North American business owners planning to retire over the next 10 years will generate over $10 trillion in personal liquidity (VIP Forum 2005)… if they successfully find buyers for their thriving businesses. Developing an exit plan is essential if you want to be ahead of the pack, and attract a buyer who can pay you what your business is worth.

Exit planning can be complex, and it takes time. For a business with $2-$10 million in revenues plan to spend a year or two prepping for a successful sale.

But the ROI from good planning could mean the difference between fire sale pricing for your assets, or reaping the full financial and personal rewards associated with seeing your venture carry on successfully for years to come.

Size Matters!

How Small is Small?

If your  revenues are roughly $2 million/year or less, you’re likely going to sell your business  for the fair market value of your assets, which could include some of the goodwill in the business. For example, if you own a dry cleaning business, flower shop or catering company, prospective buyers want to  generate an income doing something they love using the location and assets you’ve established.

Your buyer may need bank financing to supplement their own capital.  And if they don’t have enough cash to close the sale plus put  cash in the kitty for 3-6 months of operations, you’ll likely need to help finance the purchase. That means you accept the risk of being repaid for a portion of the purchase price over time by the new owners. This is often an important measure in closing the gap between the buyer’s offer, and the seller’s price.

A professional accountant should be able to help you get prepared for the sale and also estimate a reasonable price for the business. Business brokers and trade publications are both good options to attract potential buyers, and you’ll want to get legal advice about how arrange the sale while protecting your interests.

The sale price of your business will depend largely on local market conditions, and how confident a new buyer is that they can generate the same level of profit you have. Willing buyers and sellers will generally arrive at a fair price. Compelled sellers may be forced to accept less than fair value.

Super-Size or Regular?

For mid-sized private businesses it’s money well spent to  develop a comprehensive exit plan. You’ll walk away with more jingle in your jeans, and avoid a nasty date with the tax man somewhere down the road!

If your business generates $2-$10 million/year in revenue a year, and employs 20 or more people, the exit planning process is a bit more complex. Even if you plan to transfer ownership within your family, your pocket book and peace of mind with both benefit from a solid exit plan.

Money Making Exit Plans Have Six Essential Elements

I spoke with Gerry McCracken of Dialectic Business Solutions Inc. to ask about best practices in exit planning. Gerry is both a Chartered Business Valuator (CBV) in Canada, and a Certified Exit Planning Advisor (CEPA). We know each other from our days working at the bank, and doing some equity work together, so I trust and respect Gerry’s advice.

Based on information from the Exit Planning Institute, Gerry’s input, and my experience coaching business owners, here are some things you’ll want to consider when planning your exit strategy.

# 1. Clear Outcomes

Deciding what your goals are is the first step.  This usually takes a bit of soul searching and weighing options such as:

  • Do you want to maximize your personal gains through a sale, or ensure future generations of your family carry forward in the business?
  • What would you like to see happen to the people who work with you, and who have helped make your business the success it is today?
  • What does retirement look like for you – and how much capital and monthly income will you need to make your life comfortable?
  • Are you prepared to help finance a new owner? If so, what level of involvement can you accept?

# 2. Risk Mitigation

Imagine leaving your grieving family with a successful business but no one to run it? Or surviving a natural disaster like Hurricane Katrina and then going broke because you need 6 months to get up and running again?

Here are a few of the basics when it comes to risk mitigation:

  • Shareholder Agreement. If there is more than one shareholder in the business, a shareholder agreement is critical. If  other shareholders are involved in the day to day management, chain of command succession should be addressed.
  • Contingency Plan. Leave clear instructions about who should succeed you in the direction of the company, especially if these key people are not shareholders. Contingency planning should form a regular part of  management planning. Get this stuff out on the table now to avoid problems that can sink your business later.
  • Business Interruption Insurance.  This provides you with cash flow if Mother Nature deals you a one-two punch, or other disasters knock your operations off line.
  • Key Person Life & Critical Illness Insurance. These coverages pay money to the company to support lost revenue or expenses incurred when an owner or other key member of the leadership team dies of suffers a prolonged illness.

# 3. Baseline and Enhanced Value

Maximizing the value of your business helps attract buyers, and makes your transition smoother. Not to mention it plumps up your bank account quite nicely too! But how do you know what your business is worth to a prospective buyer? And how do you maximize that value?

Here’s how to put some credible information on the table.

  • Establish Baseline Value. Selling your business as a going concern implies your buyer has the expectation of future profits. That’s far different than simply the value of your assets. In fact, if you are in a service business such as IT consulting or accounting, the value of your assets will be very low compared to profits your company produces. It’s a different perspective if you’re in a capital intensive endeavor such as manufacturing, although your goal is still to ensure the business is valued relative to its ability to generate cash and profits. Engaging a qualified Business Valuator is the best way to establish a base line value. Valuators can also assist with financing advice, and value enhancement strategies.
  • Maximize cash flow, and profits. Seems obvious right? Keep in mind prospective buyers will likely need financing. That means you need a steady track record of profitable operations and strong cash flow to attract a buyer and position them to secure financing.
  • Ensure financial records are up to date and accurate. You’ll need at least review engagement financial statements (larger business may need full audits) to work with a 3rd party purchaser, as well as for bankers and/or investors. If you don’t currently have at least review statements, work with your accountant to identify any record keeping or management issues that need to be cleaned up so the due diligence process goes smoothly.
  • Optimize systems and processes. The more the business runs on autopilot the smoother day-today operations are. Potential buyers and investors look at how well the business runs when you’re not there. And since you may retain an ownership position, or carried interest in the company to help finance the transaction, you have a vested interest in making sure things run smoothly when you’re not at the helm.  Flattering as it may seem to be indispensable to the business, it can be a handicap to selling it.

# 4. Clear Up Potential Obstacles

Getting your legal matters in order helps avoid surprises that can delay or derail a sale. A couple of things you should look after are:

  • Share or asset sale. Buyers usually prefer to buy assets, while sellers would rather sell the shares. This is generally a tax driven decision, but could affect the price by a significant amount. Be clear on how the transaction is to be structure before settling on the price. Advice from tax experts is needed here.
  • Ensure you can exit or transfer legal obligations. If you have a personal guarantee for a lease or bank debt, will you be able to retract it or transfer the obligation to new owners?
  • Transfer title to assets that won’t stay in the business. Do you have assets in the company name that need to be transferred – say your lux guest home in the Bahamas? Or the SUV your kid drives to college?
  • Examine your shareholder agreement or decision making process. Establish the legalities of decision making, including any shareholder or director resolutions that you can put in place now. Having a buyer at the table only to find a major decision maker isn’t happy is a waste of time for everyone.

# 5. Action Plan

There may be 100 ways to leave your lover, but options to divest your business are not quite as plentiful. Here are the most common ones:

  • Transfer ownership to family members. If your plan is to keep your business in the family, there are some important and often contentious questions to consider. For example, if Junior takes over, do you have other children you need to fairly provide for as well? And, is Junior ready to run the show? How much, or how little, do you want to be involved after you retire, and how much of your net worth do you need to recover right now to finance your retirement?
  • Management buy outs. If your long term plan has been for key people in your leadership team to buy you out, you’ve likely  been grooming your successors, and helping them build equity for some time. If not, you’ll need to decide when and how to approach this conversation and who you’ll extend the offer to.  Managing the ripples that occur around planned changes in ownership is vital to protecting your business before and during the transition.
  • Sale to third parties. Business owners often have a short-list of prospective purchasers in mind. Competitors, suppliers and other businesses with natural synergies are all good candidates. But knowing when and how to approach your prospects, and what information to share, takes some planning. You don’t want your best customer getting spooked, or your top 2 employees jumping ship because they don’t know what’s going to happen to them.
  • Liquidate your assets. Sometimes there just isn’t a viable option to sell your business as a going concern. If you’ve looked at all the angles and still can’t find a deal that works for you, winding down and selling the assets may be the best thing. Timing is important to ensure you’re able to repay debt, and exit long term obligations such as leases for equipment or premises. You’ll also need to decide when to break the news to your employees, customers and suppliers so all parties can manage their interests appropriately. Not easy, but it can be done.

# 6. Marshall the Troops

McCracken suggests that getting your business ready to sell is a bit like playing golf. A great caddy can advise you about the course and obstacles, and hand you the right club to play … but it’s up to you to take the swing.

As a business coach I endorse this view of things – it’s a big help to have an advisor who understands your needs completely, and will help you bring in specialists as needed.

So who do you need on the team to make your exit successful?

  • Exit Planner. Your advisor needs to help you, your family and other vested parties reach agreement about desired outcomes and how to proceed. No small job at times! You advisor should have a sophisticated understanding about business structure and operations, but even more importantly you need to trust they are your ally in developing and executing a comprehensive plan.
  • A Qualified Business Valuator. Hiring a qualified valuator is the best way to get an informed, impartial opinion of the value of your business. Training for Business Valuators is rigorous, so you can have confidence they won’t just “guestimate” what your life’s work is worth. Make sure you see the valuators qualifications and credentials before engaging them. A stopped watch is only accurate twice a day.
  • Professional Accountant. When it comes to business taxation, corporate structure and related matters you want the best advice you can find. With tax rates in excess of 50% on capital gains in many countries, minimizing tax obligations is a big ticket item.
  • Legal Advice. Experience is just as important when it comes to selecting the lawyer you work with. There is a lot of interplay between legal and accounting decisions so hire professionals with a track record of effective collaboration. The closing date on the sale of a business can be a very tense time – having a savvy lawyer with strong negotiation skills by your side can make things go a lot more smoothly.
  • Wealth Management. Getting sage advice on how to invest the money you receive from the sale of your business provides peace of mind over the long haul. After all your goal is to enjoy retirement, and your new adventures, right?

Making a Grand Exit

With exit planning, as with golf, every shot has to be played where it lies. And just like golf the round has to play out until it’s in the cup…there are no gimmes.  So take a long view of things, get the help you need, and play the game of your life!

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Janine Gilmour

Janine Gilmour

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