Exit Planning Tools for Business Owners

business strategy

Thinking About the Future: What’s Your Plan?

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Dial to show planning for the futureWe’ve all heard the saying, “Fail to plan, plan to fail.” This is extremely pertinent if you’re thinking about the future of your business. Many owners focus solely on the exit transaction itself without spending the time to properly prepare for it. Transitioning your business can take many forms, from passing to a family member to selling to a strategic partner. Here are some things to think about before you transition.

Are you ready to leave?

Many business owners fail to consider what they’ll do after a transaction. Do you plan to continue to work in the business? For how long? To whom will you report? If you’re no longer the owner, then you will NOT be in charge. If you’re not present, is existing management prepared to run the business? What will you do?

Have you mapped out your financial plan?

Before any transaction, you should evaluate your finances and create a personal balance sheet with a lifetime spending plan. How much wealth does it take to retire? What kind of lifestyle do you plan to have? Have you considered medical costs? Don’t forget to update your estate plan to take into account personal and charitable bequests.

What’s your business worth?

Sure, you may have an idea of the value of the business. How can you best position the business for maximum value extraction? What’s your best option? What about non-financial considerations?

The decision to turn over your business to someone else is a difficult one. Think about your goals before you proceed, then “Plan your work and work your plan!”

Invest 15 Minutes and take our FREE Exit Readiness Assessment. We do not request any confidential information.

Mary D. Richter is a tax shareholder who has been serving tax clients for more than 25 years. She has worked in both public accounting and private industry. Mary has a diverse tax background with experience in federal, state, and international tax and business issues and has provided dedicated client service to multinational manufacturing and service entities in all phases of the business cycle, from start-up to exit strategy.

Wealth Management for Business Owners

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businessman watering money to signify growth

Wealth Management Considerations for Business Owners

Small business owners are at times neglected by the wealth management community as the business is commonly (not always) the owner’s largest asset rather than a portfolio of stocks, bonds, and mutual funds. You’d be well-advised as a business owner to engage a Financial Advisor who is proactive and experienced in factoring your future plans for the business, into your overall plan for managing your wealth.

 

Key Elements of Exit Planning

Impactful wealth management for you as a business owner would include at least these elements of exit planning:

  • Clarifying what “exit” means to you. For example, do you want to leave entirely at some point, or gradually over time?
  • Clarifying your financial, values-based, legacy goals, and what role the business needs to play in attaining your goals.
  • A financial needs and gap analysis with an accurate valuation (not back of the envelope – meaningful planning requires accurate data) of the business. How much $$$$ will you need to do everything you want to do after the business? Is there a financial gap? Will that gap need to be closed by increasing the value of the business?
  • Personal risk management including asset protection, insurance planning, tax planning.
  • A current estate plan — a business owner cannot do exit planning without doing estate planning.
  • A plan to preserve the value of the business (typically a small business owner’s largest asset), and a plan for it to survive during unexpected events of your permanent disability or death.
  • An appropriate plan for managing financial assets resulting from the successful sale or transfer of your business.

Exit planning is wealth management for business owners that requires assessing, preserving, and building the value of your largest and most complex asset…your business.

Invest 15 Minutes and take our FREE Exit Readiness Assessment. We do not request any confidential information.

Pat Ennis is the President of ENNIS Legacy Partners. The mission of ELP is to help business owners build value and exit on their own terms and conditions.

Business Succession Planning Is There Life After Death?

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Consider this scenario: You’re part owner of a thriving small- to medium-sized business. You handle certain key responsibilities and rely on your partner to handle others. While your partner is away on business, the phone rings. The shaky voice at the other end of the line informs you that your partner has been fatally injured in a car accident. You’re grief-stricken. At the same time, you realize many people—you, your family, your partner’s family, your employees, customers, and creditors—depend on the uninterrupted continuation of your business. You know you should have planned for this. . .but you just never found the time.

What If I Wait?

<man at cemetery with rosesIs this a situation you secretly dread the possibility of facing because you’ve never “found time” for business succession planning? Once tragedy strikes, it can be the worst time to deal with these issues. Under some circumstances, it may be too late. Consider the following potential risks you could face without a proper business succession plan in place.

An owner’s unexpected death may jeopardize the long-term viability of a company, whether it is a sole proprietorship, partnership, or corporation. For instance, loans may be called, or work in progress may be put on hold until a replacement can be hired. In the meantime, customers may gravitate to your competition, making it difficult to win them back.

Moreover, once a business is in crisis, selling a deceased owner’s interest may result in the surviving spouse or family members settling for a price that is less than fair market value (FMV). Since stock or partnership interests in a closely-held business are not publicly traded, their value is not established without a business succession plan.

Finally, although a deceased owner’s estate plan may have made sense for his or her estate, it could spell disaster for the business. For example, if the company is an S corporation, and the trustees of a family trust become stockholders in the business, an inadvertent termination of the S corporation election may result if the trust does not qualify.

Secure Your Future

A business succession plan helps reassure all parties the business will continue to operate. It establishes a monetary value for each owner’s business interest before the need arises. It also helps prevent problems by coordinating each owner’s estate plan with the business. One of the key components of a business succession plan is a buy-sell agreement.

A buy-sell agreement is a contract that creates a market for a deceased owner’s business interest. It obligates the owner’s estate to sell his or her shares for a predetermined price to partners or shareholders (a cross-purchase agreement); to the business itself (an entity agreement); or to both (a hybrid, or “wait and see” agreement).

Life insurance is commonly used to help fund buy-sell agreements. It provides tax-free money at the owner’s death, and can also help fund a buyout at retirement or in the event of a disability. Points to consider in choosing a policy include the size of the death benefit; the flexibility to change the death benefit as the business’s valuation changes; and the size of the cash value component. Also of importance are the policy’s ownership, beneficiary designations, and endorsements.

Smart Moves Help Beat the Odds

Relatively few closely-held businesses pass to the next generation. A demanding schedule may lead to procrastination. However, with so much riding on a proper business succession plan, investing the time to prepare one now—and to review it periodically—may be one of the smartest business moves you’ll ever make.

Keep in mind you’ll need qualified legal, financial, and insurance assistance in establishing your buy-sell agreement.

Mark Hegstrom is Certified Exit Planning Advisor and helps business owners to plan for what may be their single largest lifetime transaction: the transfer of their business. Get started by completing an exit readiness Assessment for yourself. Mark is Managing Partner at Business Owner Succession Strategies (BOSS). He currently serves as President of the Exit Planning Institute -Twin Cities Chapter.
 

The Dismal Ds and Exit Planning

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The “Dismal Ds” is an inside joke in exit planning. Every industry and profession has them. In some, it’s “You can have it done well, done fast, or done cheaply. Pick any two.” In planning it’s “Sooner or later, every owner exits his or her business… 100% guaranteed.”

Clearly, that refers to the unplanned but inevitable departure from the biggest D – Death. That isn’t the only D, however. There are others, NONE of which lead to a controlled, lucrative, or enjoyable transition. Most start with dis- defined as “dis– 1. a Latin prefix meaning “apart,” “asunder,” “away,” “utterly,” or having a privative, negative, or reversing force.”

The other Dismal Ds include:

  • Disease – the critical illness of the owner or an irreplaceable employee.
  • Dissension – between partners, shareholders, or family members
  • Disaster – Fire, flood, storm, or accident
  • Disability – An owner’s inability to oversee operations
  • Disinterest – of the founder or next-generation ownership
  • Distraction – When an owner’s focus is elsewhere. (frequently love or bar ownership)
  • Disarray – More simply, bad management
  • Dishonor – financial fraud or other skulduggery
  • Disenchantment – A fancy word for burnout
  • Divorce – a bitter fight over the business asset or its value
  • Debt – Leverage taken on in good times but no longer sustainable
  • Depression – Economic malaise (think hospitality in 2020.)
  • Defection– The poaching or bolting of a key employee, frequently in sales
  • Defenestration – Getting thrown from a window

(Okay, I may have gone too far with that last one, but I couldn’t resist.)

Planning – The Cure for the Dismal Ds

The point is, there are many ways of a forced exit from your business due to circumstances. Some might be beyond your control, but most can be avoided.

  • Disease – Have solid business continuity instructions in place
  • Dissension – Start with a good buy/sell or shareholders’ agreement that makes it plain how disagreements will be handled
  • Disaster – Fire, flood, storm, or accidents can be insured, including for loss of revenue.
  • Disability – Business continuity instructions again
  • Disinterest – Start implementing an exit plan before your business shows the effect. For example, in brokerage, we used to say “Show me an owner who says he is burned out, and I’ll show you financial statements that evidenced the problem three years ago.”
  • Distraction – Don’t buy a bar. Don’t buy another business. Don’t have an affair.
  • Disarray – Get help. Consulting, coaching and peer groups all work.
  • Dishonor – Have an outside party check your systems and security.
  • Disenchantment – See Disinterest
  • Divorce – Settle the value of the business first, preferably before the lawyers do it for you.
  • Debt – Limit your debt to half what your current cash flow can service.
  • Depression – If you have to cut expenses, do so deeply and quickly.
  • Defection– Two words- employment agreements
  • Defenestration – Stay away from the Departed, or Irish, Italian, and Jewish mobsters in general. Alternatively, live where there are only low-rise buildings.

Dismal DsI obviously have my tongue firmly planted in cheek for this column, but my point should be clear. Your business is probably the most valuable asset in your life. Losing it to unplanned events hurts. So even if you are no longer in the picture, you have some responsibility to your family, employees and customers.

A good exit plan, whether it’s for implementation now or years down the road, should take many, if not all of the Dismal Ds into account. All entrepreneurs want control over their future. That is why they are entrepreneurs. Planning isn’t merely an intellectual exercise. It’s all about control.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He is the author of Your Exit Map: Navigating the Boomer Bust, and two other books on business ownership. If you want to see how prepared you are for transition, take the 15-minute Assessment at MPNInc.com/ExitMap. 

 

Succession Planning Starts with “What’s Next”

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Asking the Right Question

What makes a business successful? In many small businesses, the owner is the principal driver, particularly from a technical and sales aspect. They are the ones running around, coordinating sales, staying late to ensure that products get made. They are the ones working the relationships with clients to ensure that the orders continue to come in.

man driving carWith all that these individuals is doing, exit planners ask, “have they ever thought about what they want to do next?” Unfortunately, there is a good chance that one of the 5 D’s (Death, Divorce, Disability, Distress, and Disagreement) could affect their businesses. Let us hope that this does not happen. However, we all know what happens when we have hope on one hand and do something else on the other!

Consider this, a $10MM S-Corporation manufacturer, with a single owner. The owner’s best friend is diagnosed with cancer. Now the owner realizes that they want to sell their company because they want to spend more time with their kids and grandkids. Will this business be able to maximize value upon exit?

Three Areas of Focus

Most owners have the majority of their wealth tied into the business. One of the ways to get that wealth is to sell the company. A successful transition plan has three areas of focus:

1. Understanding and maximizing the value of the company
2. Understanding the owner’s future financial needs
3. Understanding what the owner wants to do after exit

The owner has an idea about one of those areas, but it is very vague. Working with owners to understand what they want to do upon exit helps with another area, the owner’s future financial needs. It is important to create a plan to understand how they want to spend their time with their grandkids. For example, the planner may ask, “Do you want to be able to pay for their future college needs, take them on nice vacations every year, or spend time skiing with them?”

Further understanding of what the owner wants to do next will help the financial planner develop an exit plan. They will be able to determine how much money that owner needs to achieve their desired lifestyle.

Once the future needs are determined, the owner can look at the current business value. The company should have a rough idea of business value. For example, it may be a function of EBITDA multiplied by a market multiple factors. While this seems simple, there are ways to improve the overall value of the company. Some of the factors may not be solely financially driven.

Succession Planning Starts With “What’s Next”

Developing a plan that addresses the owner’s exit ahead of time isn’t just good succession planning; it is good strategic business planning. By creating this plan, the owner can understand the context of what the company is worth. They will find ways to maximize business value and take into account their financial needs for the future. And finally, they can create a plan for how they will spend their time and lead to a successful exit from the company. As a result, the owner can enjoy their time instead of wondering, “Did I do something wrong? Could I have gotten more out of the sale? What am I going to do now?”

This article was first published on the Schneider Downs blog “Our Thoughts On.” John Kohler, CPA, CEPA has more than 15 years of experience in assisting clients in a variety of tax and accounting functions across numerous industries. He actively assists clients with business succession opportunities, helping them identify options for successful ownership transitions to families, third parties, and strategic partners.