Business succession and exit planning is the process of preparing a business for sale, transition, or other exit strategies. It involves getting three things right: the business, the owner’s financial situation, and personal goals.
Specific aspects must be considered to prepare a business for sale or transition. Most business owners aim to maximize the value of their business before they exit. In addition to the business, the owner must be financially prepared for the sale or transition. The business owner’s personal goals are also crucial, especially since the average life expectancy is now 82.
Retirement can pose two problems – boredom and uncertainty about what to do next. Therefore, it gets people thinking about what they want to do after their business is essential. Starting a discussion with Steve Covey’s quote, “Begin with the end in mind,” is crucial. It helps entrepreneurs set clear goals for their businesses.
The 21-step process for implementing a business succession and exit plan has five stages that all revolve around value. The first stage involves identifying value, including determining the business valuation’s starting point. The second stage entails protecting value by ensuring proper risk management and asset protections are in place. The third stage involves maximizing value, ensuring that business value is at its highest and the business is ready for a business succession plan. The fourth stage focuses on extracting value, which is the liquidity event or transaction. Finally, the fifth stage aims to manage value post-sale or exit, ensuring that assets are protected, and value is invested to fund retirement.
- Identify value
The first stage is about identifying value. Determining the desired outcomes and goals for the owner or owners is the first step to planning a successful business.
Next, we evaluate the current situation, including the business’s value, potential risks, and current standing, to develop a plan to achieve the desired outcomes.
A Business Insights Report presents an in-depth business analysis from two perspectives. Firstly, we examine the current state of the business, identifying potential issues that may arise and cause concern or lower the value. Secondly, we focus on the business’s growth potential, exploring ways to increase its value by implementing strategic changes over a 12 to 18-month period.
For instance, a business valued at $5.25 million could be worth $7 or $8 million with strategic changes. A month-by-month plan is devised to achieve the desired outcome by identifying the critical value drivers of the business.
- Protect value
Then we’ve got to press the pause button and talk about asset protection and protecting the value we’ve already built and now identified.
The first step is to have a financial planning conversation to address critical questions such as the funding gap, retirement funds, tax planning, and asset management. Depending on your situation, consider setting up a retirement plan (401K) or other structure to manage your assets.
Planning for unexpected events, such as accidents or illnesses, is also essential. Planning involves having documents, such as shareholder and buy and sell agreements, to provide certainty on what will happen in such cases. You may also need to consider insurance to protect yourself and your business.
Ignoring risk management can have serious consequences, especially for privately held, family-owned, or mid-sized businesses. While growth is essential, it’s equally important to manage risks to avoid potential problems down the line.
- Maximize Value
Now comes the interesting and exciting stuff: how do we maximize the value of the business?
We must focus on critical steps that reduce risk and improve productivity and performance to enhance the value. These steps involve developing necessary strategic plans, creating financial models that align with the strategy, and ensuring that all aspects of the business are well-prepared and focused on driving performance. Every completed step or project should bring us closer to achieving our exit plan goals.
Do we have a financial model that can measure and monitor our financial performance to our strategic objectives? If a business owner tells me they want to sell their business for $3 million in five years because they will be turning 65, I can quickly determine what the business needs to achieve this goal. This involves considering turnover, staff numbers, margins, and profits. A strategic plan is necessary to achieve this target, rather than hoping the business owner will reach $3 million in five years without planning.
- Extract value
Now, the extraction piece. After all of the preparation, we are harvesting or extracting the value of the business.
It is essential to consider the tax implications of a liquidity event, as it can take a long time to get it right. No matter which exit option we choose, taxation will likely be triggered. Although it can often be minimized, it is time-consuming.
Documentation is also critical. We need to start compiling all of the necessary due diligence materials, not just an Information Memorandum document on how to sell a business.
The Liquidity Event itself deserves special attention. While most business owners and brokers will advise you to focus on increasing profits, other ways exist to get more money for your business. The best way is to determine who to sell to and how to sell it.
- Manage value
The last stage is around managing the value we have successfully extracted. How do we manage for future generations?
After successfully exiting, it is important to understand that there are three more steps we need to undertake to ensure our financial stability in the future:
- We must consider where to invest to manage our finances during retirement.
- We need to protect those assets as it is unlikely that we will be able to earn further assets soon.
- We need to plan our estate and decide how we want our assets handled to provide for our family and future generations.
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