Lack of exit strategy can prove costly when it’s time to sell
During the nine years I’ve been a business broker, I’ve seen very few companies with a written exit strategy.
Most owners have a vague idea in their minds about what will happen to the company after they leave. They may plan to sell the company to a family member, a group of employees or a third party, but in most cases they have no written plan.
Also, most business owners have no idea how to value their company or what the business is worth.
They may have attended a trade show and went to a seminar on business valuation or read something in an industry publication, but they have never talked to a business broker or with an accountant or other professional about the value of the tax consequences of selling the company.
The results of not having a written exit strategy are similar to talking a trip without using a map or GPS.
The driver may get to where he or she wants to go, but the journey often takes much longer and consumes more time and resources than a well planned trip.
An exit strategy needs to be in place well before a decision to sell is made. A written exit strategy should be prepared five to seven years before an owner decides to transition out.
Also, many business owners are forced to sell because of unexpected health issues, family problems and other factors beyond their control. If an exit strategy isn’t in place, the owner will—in all likelihood—get much less than then expect or not be able to sell the company at all.
Developing an exit strategy is a process and involves a system.
The plan allows an owner to receive the maximum amount of money for the company and lets the owner achieve personal, financial and estate-planning goals.
There are several questions that every business owner should consider when planning an exit from their company:
They are:
- Why and when does an owner want to implement the exit strategy?
- Does the owner know the value of the company? Has the owner talked to sources outside his company and industry to determine the value?
- How can an owner, preserve, protect and promote the value of the company until the written plan is put into effect?
- What is the best way to convert the value of the company into cash? Should the company be sold to employees or family member? If it is being sold the employees or a family members are they qualified to run the company after the owner leaves? If the plan is to sell to a third-party, how and who should help market the company?
After considering the questions, an owner should start work on a written plan that includes contingency plans and several what-if scenarios.
Of course, the owner can do all of the planning and writing of the plan alone. The planning takes a team consisting of multiple professions—people with diversified skills and talents and team members with exit-planning experience.
Members of the team should include a financial planner, a business broker, an insurance advisor, a lawyer as well as a CPA and estate planner.
A well planned and executed exit from a privately held company will result in maximizing the value of the company and the implementation of effective tax and estate
planning strategies.
Not planning an exit usually results in disappointment at best and, at worst, closing the business and getting nothing for the company and the years of hard work the owner has put into the business.
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About the author: Paul Kelleher has been a broker at Venture Resource, Louisville for the past nine years. He has an MBA from Xavier University, Cincinnati. His e-mail is: pkelleher@venture-resource.com