Business Owner Exit Planning 101
“The plan was smooth on paper, only they forgot about the ravines.”
Russian military proverb
During a recent lunch with a colleague, our discussion gravitated towards our businesses and how each of us is dealing with the current economic environment. I asked her a question I inevitably ask most business owners I know. “What is your Exit Plan for your business?” Her response was fairly typical, if not slightly more hostile than usual. “Just how old do you think I am?” And with that, I had the answer to my question.
Exit Planning is a process, not an event that happens when an owner is ready to sell his or her business. Exit Planning starts at the creation of the company and evolves over time to end with the final transfer for value, whenever that may be. In my experience, most business owners are excellent in the start up business planning process. Yet it is very common for them to neglect or even completely ignore their plan on how to “unwind” their involvement and leverage the company’s value.
A successful Exit Plan for a business requires more effort than starting one for most owners. There are many reasons for this:
- It can be complex; it requires coordination with your personal retirement, tax and legacy planning. Trying to integrate all of these can be challenging.
- Many owners aren’t financially or emotionally ready to plan their exit
- Owners don’t know what other options they have besides an outright sale of their company
- Objective advice can be hard to come by
- There are risks they are not even aware of; dealing with an unplanned exit (i.e. death, disability, divorce, etc.) generally involves all of these obstacles and then some.
Exit Planning starts with dealing with an unplanned exit while the company is still in its growth stage, usually years away from what the owner would consider retirement. This is generally accomplished through a Buy/Sell agreement. Think of it like a prenup with your business partner just without all the love. Whether it is a solo firm or one with multiple owners, the challenges remain the same: what are the ways you may have to prematurely exit your business and how do you prepare for them to minimize their impact and/or maximize the value? The colleague I mentioned above has a partner in her company so let’s look at this type of corporate structure. Some of the major exit triggers they face are as follows:
- The “Things Just Aren’t Working Out” Trigger- she has a falling out with her partner and they decide to part ways. Of course, this is usually last on everyone’s list to address. After all, who wants to plan to fail? But what happens to this business that has been built? Who buys out who? Who gets that key client in
- Incapacity Trigger- what if she or her partner develop a terminal illness or suffer a disability? Health situations can sometimes become very ambiguous and difficult to work through with partners. What if she can work but only 3 days a week because of an illness? At what point should she be considered disabled and/or have her income reduced? Can you imagine starting this discussion/negotiations after the fact?
- Divorce- What if one of the partners gets divorced? Can there be a claim on her ownership? If so, how will the company address this? Can the company require a sale of the stock and if so, who sets the price?
- Death- Does she want to go into business with the spouse of her deceased partner? Addressing the terms and financing now just in case this happens will makes things go a lot smoother. Arguing with your deceased partner’s husband about the value of the company can take the situation from real bad to a whole lot worse.
Takeaways:
Structure a carefully designed buy/sell agreement for your current business environment. Making a copy of your workout partner’s company agreement and filling in the blanks doesn’t count. A one size fits all approach does not work here.
If you have an agreement and it hasn’t been reviewed in the last 12 months, sit down with someone and go through all of the provisions to see if any changes are needed.
Make sure your agreement addresses all possible trigger points, not just retirement or death. Determine how you will value the company now for each event. If you need an appraisal to do this, get one.
Flexibility is the key; keep in mind that you will be reviewing this each year or so to make changes.
Remember that absent any planning, you still have an Exit Plan by Default. When one of the possible exit triggers occur (and one will eventually) and you don’t have a plan to spell out the details, someone (your partner, your partner’s spouse, the government, etc.) is going to have a plan for you. And you probably aren’t going to like it.
Develop your Exit Planning Team now. This should include, at minimum, your CPA, attorney and financial advisor. Other team members may include a business broker, investment banker, insurance/risk manager and some of you own internal staff.
