Exit Planning Tools for Business Owners

entrepreneurs

Exit Planning Checklist for 2020

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The beginning of a new year is a great time to review your Exit Planning Checklist. All business owners will stop being business owners at some point.  So, there is no better time to begin planning for the inevitable than the present.  The earlier you begin planning, the more options you will have for a successful exit.

exit planning checklistHowever, like any strategic plan, it can be difficult to know how and where to begin.  With the start of the new year it’s also an ideal time for us to publish a basic “To-Do List” that will serve you in considering that most significant event as a business owner…your future exit.

DECIDE WHERE YOU WANT TO GO

Establish Clear Goals and Objectives for Exit and Your Life After Exit.

  • When do you want to leave the business? Whom do you wish to transfer/sell the business to?
  • What are your values-based and legacy exit goals?
  • What is your post-exit “life-plan”? Business owners can often regret leaving when lacking a plan for life that replaces the sense of purpose and meaning they experienced in building their business.
  • Update your Personal Financial Plan. Find out how much $$$$ you will need post-exit to do all you want to do. Is there a gap?

ASSESS WHERE YOU ARE 

Without Accurate Data All Planning Becomes Meaningless.

  • Get an accurate Business Valuation. If the business is your largest asset shouldn’t you know what it really is worth to potential buyers?
  • Assess your business Value-Drivers and areas of Risk.
  • Review your Business Continuity Plan for life transitions and unexpected death or disability. Co-Owners would include a review of their Buy-Sell Agreement to ensure alignment with the current goals of all owners.
  • Review Estate Plan to ensure alignment with exit goals.

 DESIGN AND IMPLEMENT A PLAN

Build Transferable Value and Enjoy a Future Exit On Your Own Terms and Conditions.

  • Which Exit Route will best accomplish your goals? Sale to Third-Party | Sale to Insiders | Transfer to Family Members | Sale to ESOP | Absentee Owner.
  • Focus on growth and profitability today. At the core of tomorrow’s successful exit plan is today’s profitability and plan for growth.
  • Strengthen business value drivers. An owner with a sellable business will have more freedom in life and options for exit.
  • Update a strategic financial plan for the business.
  • Do you have the right Team of Experienced Advisors for plan design and implementation?
  • Who will Manage the Exit Planning Project?

The most important thing you could do in 2020 would be to GET STARTED AND GET HELP if you have yet to do so.  If you wait until you’re ready to exit to begin planning, you won’t be ready and neither will your business.  Keep in mind, that “You don’t know what you don’t know” and, like in all other areas of life, that could end up being disastrous.

There is much at stake during this most significant event in your life as a business owner.  Take steps in 2020 to be as responsible and successful in planning your eventual exit as you have been in running your business. You can start with this Exit Planning Checklist.

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

 

Baby Boomers’ Influence – Still Strong

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There is ample evidence in the marketplace that Baby Boomers’ influence is still powerful. From walk-in tubs to stand-up bikes, and from pharmaceutical commercials to river cruises, Boomer tastes are catered to in every market.

We all know the sterotypes of the “typical” Boomer. Goal oriented, workaholic, spendthrift, and oriented towards accumulating material evidence of their achievements. They identify work and position with their value in society. We have also discussed often in this space the issues of employers who have to replace the corporate knowledge base of retiring Boomers.

Clearly, one way to keep the economy moving upwards is to encourage Boomers to work longer and accumulate more. The more they earn, and the more they spend, the better we all fare. (Except, of course, for the Gen Xers who are behind them in the promotion queue.)

Boomers Influence Legislation

One really obvious example of this is the SECURE (Setting Every Community Up For Retirement Enhancement) Act, which took effect on January 1, 2020. It was missed by many, gliding through as a budget attachement, and absent the histrionics that seem to accompany any legislation in Congress.

What could be so important and universally desirable that both parties would happily cooperate? Getting the Boomers to work longer. How do you accomplish that? Give them the opportunity to accumulate even more than the $17 Trillion (one year’s GDP) that they already hold in personal assets.

The SECURE Act is aptly (if somewhat elaborately) titled. Boomers who are more financially sound will be less of a burden on the public sector. That’s the Community benefit referred to in the title. In addition, as Social Security feels the pinch of paying back those who funded the first two generations of beneficiaries, it theoretically will reduce the outcry when benefits are reduced.

The New Terms of Retirement

The act doesn’t provide Boomers with additional benefits. Instead, it gives them the chance to pay more into the system. Here are the major changes.

  • The age at which you must start taking Required Minimum Benefits from your employer or individual retirement plans has been raised from 70 1/2 to 72 years old. (Social Security benefits, however, still max out at age 70- even though you would still have to make SS contributions.)
  • You can continue to pay into your retirement plan of any type for as long as you want- there is no longer a cutoff age for contributions.
  • Small business owners may now group together to offer retirement plans. Formerly, many were too small to bear the costs of having a 401K, for example.
  • Part time employees (read: semi-retired Boomers) can now participate in employer retirement plans.
  • Employer plans may now offer annuities for lifetime income among their options.
  • Inherited retirement accounts must be spent in ten years- they cannot be rolled to another generation.

Are you getting the message? We’d like you to to work longer, pay more in taxes, and (at least theoretically) leave more behind when you go.

Why is this indicative of the Boomers, influence? Because that’s exactly what we seek. With health care, exercise and nutrition so much better than for previous generations, we were saying that 60 is the new 40. Now we are saying that 70 is the new 50.

No one is forcing us to work longer. They are just recognizing that many of us want to. C’mon Boomers, you fueled the longest sustained expansion is US history (40 years from 1968-2008.) Can’t you do just a little bit more?

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He is the publisher of Awake at 2 o’clock, and has authored three books on business ownership.

Why Plan Now? Exit Planning for Small Business

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Owners ask all the time, “Why Plan Now?” “I’m not planning to leave my business for years. I feel good, and I still enjoy my business. I’m not sure what else I would do. Besides, if my company is only going to sell for two or three times earnings, I can make more than that by sticking around.”

All are valid arguments. Baby Boomers, the youngest of whom turned 55 this year, are working longer and are more active well into their 60s and often into their 70s. The term “next career” describes the growing portion of the population who are choosing another full-time activity after leaving their jobs or businesses.

Why Plan Now?

That said, there are good reasons why every Baby Boomer business owner should have a documented exit plan.

why plan now?

  1. A plan is not an action. As the late, great Yogi Berra said, “If you don’t know where you are going, you may wind up somewhere else.” The process of deciding what your ultimate outcome should be gets you mentally prepared, but implementation only starts when you say so.
  2. It will focus your efforts. Say, for example, you decide that ultimately you want to sell to your employees. Your investments in hiring and training will look very different than if you plan to sell to a large competitor who would shutter your operation.
  3. It will make you a better business owner. Thinking through the things that drive value in your business, (employees, products, and customers,) will inevitable highlight what could be improved. You will look at your business through a buyer’s eyes. That lends a whole new perspective.

The first four parts of this series dealt with various exit scenarios. This is about your timing.

How to Start

There’s a ton of resources both in past articles on this site (indexed by topic) and in our free library of planning tools and educational materials at www.YourExitMap.com. Many Financial Planners, Bankers and CPAs are getting one of the certifications in exit planning (Either the Certified Exit Planning Advisor – CEPA or the Certified Exit Planner- CExP.) That equips them to have a broader conversation that just focusing on their specialty.

Chapters are springing up of professionals who specialize in exit planning. Booth the Exit Planning Exchange (XPX) and the Exit Planning Institute (EPI) regularly offer seminars for owners considering their exit strategy, Between the two there are chapters in about 40 US cities.

Try putting the term “Exit Planning” in an Amazon book search. You’ll have a choice of about 25 titles.

Finally, there’s my standard (if somewhat cliched) answer to the question “Why plan now?”

Because sooner or later, every owner leaves his or her business, whether voluntarily or otherwise. It’s only the biggest financial event of your life.

John F. Dini, CExP, CEPA is an exit planning coach and the President of MPN Incorporated in San Antonio Texas. He has authored three books on business ownership.

Selling to Employees: Exit Planning for Small Business Part 4

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Selling to employees is one method of transition that is growing rapidly in popularity. Usually the  driving motivation is a desire to help the people who got you this far enjoy some of the benefits of ownership, but there is a substantial list of other benefits.

  1. Pricing is agreed at the start, not in adversarial negotiations.
  2. Valuation is flexible. The business can be sold for more or less than its Fair Market Value, as long as both sides agree and cash flow supports it.
  3. The legacy of the business lives on in the community.
  4. Where there are substantial challenges to an outside buyer, such as industries whpiere work goes to the lowest bidder, employees are more confident that they can succeed in the system.
  5. Financing is built into the transition plan.

(By the way, if you are just picking up this series now, prior topics included strategies that aren’t suited to small business, selling to a third party, and selling to family.)

“But they have no money!”

That’s the most frequent objection when we suggest an employee sale, but it is easily remedied by time. In fact, time and risk are corollaries. The more time you have, the less risk you’ll take. Faster is riskier.

At one end of the spectrum we’ll say you want to exit the business in the next thirty to sixty days. That’s probably enough time to draw up a purchase agreement and transfer ownership. The payment for the business would be entirely in an installment note from your workers. Rapid exit, but maximum probability that you will never see the entire purchase price.

On the other hand, what if you have five to ten years for selling to employees?  You could sell stock for a note, and let employees pay for their shares with bonuses based on increasing profitability. They are motivated to grow the company, while you continue to receive all the profits you were due anyway.

As they increase their ownership, they can qualify for lender financing to purchase your equity. Done well, and with enough time, you can realize the full value of the business and increase your short-term income along the way. Time gives you lower risk, and the potential for higher reward.

Are they qualified?

That is another question entirely and one that depends largely on you. If you’ve hired the right people and trained them well, selling to employees is a breeze. If you are the center of everything that happens in your business, it could be a problem.

Remember, the more you work in your business the less it is worth. To see how dependent your business is on you, take the quiz at www.ownercentricity.com.

What if they are willing and able, but not ready? Or perhaps you have a few key managers, but they lack some critical skill sets? Again, time gives you the flexibility to deal with those issues.

You may not have anyone who could ever run the business. Again, with suffcient time, you can “hire your buyer.” I’ve seen businesses where an owner used the promise of ownership to recruit someone whom he’d never attract otherwise.

Selling to employees is the ultimate exit plan in your level of control over the process, determining how much you want from the transaction, and choosing your date of departure. If you haven’t considered it in your list of options, you might want to think again.

New! The affordable exit planning system for small business. 9 modules, 9 online tools and completion in 90 days. Take a look at ExitMap® Express!

Family Succession: Exiting a Small Business Part 3

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It’s time to discuss family succession. In Part One of this series we looked at exit strategies that aren’t really available to small businesses, and in Part Two we discussed selling to a third party. Now let’s talk about the issues when transferring to a family member or members.

Which Kids?

When passing the business to family, often the primary issue is inheritance. Small business owners frequently have 50%, 60% or as much as 80% of their personal net worth in their company. There is a temptation to treat the business like any other personal asset, and divide it among all the children.
dinner
“After all,” (the logic goes,) “We built this for our family’s security. It isn’t fair that only the kids who work in the business should benefit.”Sometimes the non-active children have succeeded in lucrative careers, like medicine or law. That may make an asymmetrical legacy easier.

Other times the children outside the business have not been successful at all. They are the ones who most need support, and in fact may be on the payroll already (although not “active” in any meaningful sense.) Parents’ expect the same unconditional love they have for them from their siblings, but it just doesn’t work that way.

Splitting it “Fairly”

When the company is too valuable an asset to balance inheritance with other assets, we recommend passing some to the active children before your death. That can be via sale, bonus or gifting, but it recognizes the active children’s contribution to the business.

Upon death, you can divide the balance of the equity evenly, but with a contract that says the non-active children must immediately sell their shares to the active ones at Fair Market Value. This accomplishes several things:

  1. The value of the business at the parents’ death  is divided “evenly.”
  2. The non-active kids get the step-up in basis, and should have no tax on the sale.
  3. The active kids retain 100% of the benefits from their efforts going forward.

Its especially important to get spouse signatures on these agreements. Valuations and agreements between family are fine, but an outsider (especially an ex-spouse) may not be as amenable.

I have a comment that I use with parents who are deciding how to divide ownership among children. “In the long run, you want everyone to still have a nice Thanksgiving together.”

Securing Family Succession

This is the other big issue. The parent wants family ownership to be their legacy, but their child or children aren’t qualified to run it. There is capable management, but none of them have the same last name.

Remember, we are talking about small business in this series. Families named Cargill, Ford or Walton need not be too concerned  about non-family management.

But for a small company, you can’t put children in a position where the resignation of a key employee could sink the whole enterprise. That makes the children subject to blackmail. Key operating skills have to be retained with incentives.

You don’t need to make key employees into partners, but they should have a vested interest in growth and profitability. This can be as simple as bonuses for company performance, but long-term retention usually requires non-qualifed deferred compensation (NQDC) plans.

These are tied to the long-term growth and profitability of the business. “Non-qualified” simply means it isn’t an ERISA-qualified benefit (like an IRA or 401K) because it is discriminatory in nature.

There are a number of forms for NQDC, mostly involving virtual equity. Phantom stock, stiock options, stock appreciation rights and warrants are all avenues for such compensation. They allow an employee to amass an increasing nest egg over time, based on tenure and appreciation in the value of the business.

Da Plan! Da Plan!

Whether you are deciding how to apportion the business for your estate, securing continuation of a management team, or just minimizing taxes on the transfer, planning is the key. Determining your goals for family succession and working through your options well in advance (5 years or more before your planned retirement,) is the secret for the successful transfer of a family business.

Without planning, you are putting Thanksgiving at risk.

New! The affordable exit planning system for small business. 9 modules, 9 online tools and completion in 90 days. Take a look at ExitMap® Express!