Perhaps one of the most challenging decisions a business owner faces is determining the right time to sell his or her business. Exit planning is a simple, yet critical, exercise that can help a business owner ensure that everything he does will support his goals and maximize the value of his business.
Exit planning is essential to avoid the common traps that business owners may find themselves in. Among these traps are:
- Receiving an unsolicited offer for the company and not knowing how to respond.
- Being approached by a management team that wants to buy the business upon the owner’s retirement.
- Having siblings, children or parents as co-owners of the company and dealing with their diverse needs and objectives.
- Becoming ill or disabled, and not having a clear plan for succession.
- Discovering too late that you will owe substantial taxes when you die or sell the business.
A good exit plan will allow a business owner to avoid these traps, and typically include the following six elements:
- Identification of the business owner’s personal objectives.
- Determination of the business’ current value.
- Assessment of the business’ value drivers.
- Determination of the most appropriate exit strategy.
- Definition of a game plan and timeline.
- Development of a contingency plan for unexpected events.
In addition, the exit plan will address the business owner’s personal, financial, family, management, employee, transition, estate, insurance, tax and retirement needs in an organized and succinct manner.
An exit planning professional will collect data, prepare the analysis, complete the valuation, provide recommendations and assist in implementing a strategy.
Among the tasks necessary in preparing a proper exit plan, it is important to develop the following elements:
- Five-year financial model of the business.
- Future valuation of the business.
- Assessment of where the business/industry is headed.
- SWOT (strengths / weaknesses / opportunities / threats) analysis.
- analysis of the value drivers from a buyer’s perspective.
- Development plan for the existing management team.
- Succession plan for the owner.
In order to do this properly, a business owner should assemble a team of advisors including an investment banker, attorney, accountant, investment advisor and insurance agent. This team can ensure that all aspects of the exit planning process are included. This in turn will help the business owner end up in a place of their choosing rather than a place dictated by external circumstances.
Joe Sweeney is managing director at Corporate Financial Advisors LLC in Milwaukee.