Business Exit Planning
A Business Exit Planning Disconnect
There is a huge disconnect when it comes to business owners that want to retire comfortably or move on, and those that have considered business exit planning and have put an exit plan together on how they will achieve it.
According to a survey from Bain Surveying, it appears business exit planning has been put on the “back burner” or is an enigma to many business owners.
In fact, the survey found that 47% of middle-market business owners 55 years and older are interested in selling their businesses within three years, yet over ninety percent of business owners have not even started the exit planning process.
Exit Planning Involvement
Exit planning involves either selling to an outside party or to insiders (children, co-owner, key employees, ESOP) and the components of a comprehensive exit plan are unique for every transaction. As an exit planner, it involves learning about the business owners’ goals and objectives, and their business and personal financial resources, in order to act as a quarterback to find the appropriate advisors to help meet these goals and objectives.
This often entails a plan to determine how much longer the owner wants to work in the business before retiring or moving on, determining what the annual after-tax income the owner wants during retirement in today’s dollars, and maximizing and protecting the value of the business. In addition to minimizing taxes and receiving full value for the business, there are additional objectives such as taking the business to the next level, shifting wealth to children, creating a legacy, creating family harmony, and providing charitable gifts or transfers.
Where to Focus
Instead of focusing on the sales price, owners need to focus on the net proceeds of the business transaction. There are often transaction fees, ordinary income tax, and depreciation recapture, debt repayment, capital gains tax, “Obama Care” investment income tax and other miscellaneous expenses that the seller often does not consider.
They should also consider minimizing risk and developing the value drivers of the business and key employee incentive planning, as part of their exit planning. There are also ways to preserve the value of the business such as through Charitable Remainder Trusts (CRTs), use of the Lowest Defensible Value, creation of multiple entities, qualified plan redesigns, and through ESOPs.
Some of the largest issues that threaten M&A deals are the company’s industry, profitability, financial systems that are in place, quality of management team, gross margins, customer concentration, asset intensity, leverage of key employees, and real estate challenges. Of course, there are remedies to these issues and putting together a plan now will help ensure that you as a business owner, will meet your goals and objectives.
As an exit planning advisor, the goal is simply to act as a quarterback to collaborate with other advisors to ensure your successful exit for you and for others involved in your life so you can rest peacefully as you “head out of town” and retire comfortably or move on to your adventure.