Many people think exit planning is an exercise a business owner goes through when it is time to sell the business. In fact, it is actually a philosophy or mentality about how to operate the business at all times. Exit planning is a process that prepares the business and everyone affected by it to always be ready for the unexpected. It is essentially a protection plan for contingencies such as the owner getting hit by the proverbial bus or other events like an unsolicited offer to purchase the business, divorce, disagreements among shareholders, disgruntled employees, disease, death, disability, litigation, etc..
Exit planning is also the process of reducing risk and improving the attractiveness of the business. Risk factors may be internal or external. An internal risk may be having a concentration of sales in one or a few customers or relying on one or a few suppliers when the supply chain can be vulnerable. An external risk may be something beyond our control, such as the COVID-19 pandemic. However, by having the right systems, policies, people, and procedures in place, along with a rainy-day fund, the effects of most events can be mitigated.
The chart above illustrates the exit planning process.
The exit planning process should be completed as soon as possible for any business. The process can be relatively short, less than one year, or it may require several years if a management team needs to be put in place or there is a large gap between where the business is today and the ideal business profile. The key is to always be prepared. That way, the owner will know if an offer is worth entertaining and is always protected against the unexpected. The process also allows the owner to work more on the business and less in the business; freeing up time to enjoy non-business activities.
In most cases, exit planning requires a team of professionals that includes an accountant, banker, financial planner, insurance agent, attorney, estate planner, and the exit planner that acts as the quarterback for the team to ensure the owner’s plan is implemented and to keep the plan on track. When it is time to sell, an experienced business broker or M&A expert should be employed to make sure the business is presented properly and to protect the owner’s interests through the transaction.
Here are some facts to help emphasize how important exit planning is:
- 78 million baby boomers – 10,000 turns 65 each day
- 84% of small businesses are owned by baby boomers
- 50% of business owners plan to exit within 10 years
- 10-12 million businesses = $10 Trillion in value transition
- 75% do NOT have an exit plan
- 30% think the family will keep the business running
- Only 30% survive the next generation
- Supply/Demand – early sellers have a better chance of selling
Early planning is the key to making sure the business owner exits on their terms and not someone else’s. Being prepared for any contingency is the only way to protect the value of the business and to make sure that value is converted into personal wealth.
If you would like to learn more about the exit planning process, please contact us for a complimentary, confidential consultation.
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