What is an Exit Plan? 

An “Exit Plan” is a pro-active plan for successfully transferring your privately-held business.  Regardless of whether your personal and professional goals include transferring your business to one or more family members, moving it to one or more of your valued employees, or selling it to the highest bidder, exit planning is the best method of putting into place the right combination of tools and circumstances for success. 

An exit plan should anticipate the significant business, personal, financial, legal, and tax issues that may be involved in transferring your business.  The plan should address these issues with specific action items.  The most useful exit plans read like a “How To” book for accomplishing the owner’s objectives.

An important, and often overlooked, advantage of exit planning is a by-product of simply going through the planning process.  The simple process of planning for your successful exit lets you, your family, and your close employees and advisors become familiar with, and get comfortable with, the idea of life after your successful exit from the business.

Who Decides on the Exit Plan?

A good exit plan starts with your values and desires.  Your exit planner should start by helping you define your values, objectives, and desires.  Are there special people to whom you want to transfer or sell your business?  Will you want to stay involved in the business during and after you transfer or sell it?  Do you want to reward special people with the transfer or as a result of a transfer?  Are there any people that you may want to protect during the transfer or after the transfer?  Your exit planner should help you articulate your goals and desires and begin the process of leading you to the path to reach your goals.

A good exit plan will help maximize the value of your business - even if your desire is to transfer the business to a member of your family.  The planning process lets you avoid under-valuing your business, and it helps you set realistic expectations about what your company may be worth.  Your advisors should help you focus on the parts of your business that create and drive value, help you minimize risks to your business and your plan, and present creative ideas to help you achieve your goals.  For example, if your business’ industry typically involves a long sales cycle, your advisors may ask you to consider increasing the final sales price by a percentage of revenue from sales that are committed but that will close following the transfer. 

The process of planning for your desired exit should also include consideration of how the transaction, whether it involves an sale to a third party, a sale to an employee or group of employees, or a transfer to members of your family, will fit with your other assets and plans for your estate.  Your exit planning team should include an estate planner and a financial planner to help in these areas.  These plans may include preserving family wealth for new generations, diversifying assets, and transferring wealth to your family, to special people, or to charities.

A formal exit planning process will allow you to designate the degree of importance you place on the logistical parts of the exit transaction.  You and your team of advisors can select from a wide range of closing methods, ranging from a “seamless” transfer to one that may include “fireworks and cameras.”  Regardless of the level of publicity or ceremony, your team of advisors should plan to make the transaction and your transition “hassle free.”

By going through the planning process, not only will you create a workable plan for your successful transition, you will also create peace of mind.  This peace of mind will benefit you and those with whom you choose to share your exit plan.

How Does the Exit Planning Process Work?

An exit plan should include some key components.  A starting point in every exit plan is a valuation.  The valuation should be performed by a person or firm that is familiar with your industry, with comparable businesses, with transactions within the industry, and with market forces.

The plan should put in writing your personal and financial goals.  Your financial goals may include a desired sales price, liquidity, tax minimization, wealth preservation, and estate planning.  Your personal goals may include ownership and management succession, legacy, reputation, employees, other stakeholders, and your special interests.

The plan should set forth the time frame within which you will accomplish your goals.  You should plan for a lead time of two to five years to allow your business to demonstrate consistent growth and long-term relationships with your customers, employees, and vendors.  This lead time also lets your business establish a stable and effective management team that provides value and does not depend entirely on you to succeed.

Most successful plans include sell-side due diligence during the implementation period.  Performing the due diligence before offering your business for sale or transfer will allow you to identify the strengths and weaknesses of your business with enough time to enhance the strengths and correct of minimize the weaknesses.  The due diligence process includes a review of your corporate records to ensure that they are up-to-date and correctly kept.  Your employment practices and agreements with employees should be reviewed.  Due diligence will explore potential liabilities and environmental issues, and it will review your insurance coverage.  The review will look at whether licenses and permits are in place and current and whether taxes are properly reported and paid.

An important piece of the due diligence review includes a confirmation that the business’ contracts and leases are in place and that their terms are being implemented to the business’ advantage.  The review will verify that the business has good title to its assets and that the business’ title to its property is protected.  The review will ensure that others who are using the business’ property have been granted permission to do so, that the business’ intellectual property is being captured and protected, and that the business’ trade secrets and confidential information are being kept securely and protected.

In addition to the due diligence, the exit planner should make recommendations that will enhance the value of your business.  The exit planner should work with you to identify the value drivers for your business and way to enhance these drivers while implementing the exit plan.  By doing this in conjunction with the due diligence review, you and your team will eliminate and minimize weaknesses and enhance and build on your business’ strengths.

Exit Planning is a Team Process.

Your team of advisors should work with you to analyze all of your exit options and to recommend those that suit your values, goals, and objectives.  The structure of the exit transaction will affect the value that you realize.  Taxes, the nature of the potential buyers, and the financial markets will affect the value in a sale exit transaction.  By understanding your most desired and your alternative transaction structures, you will be in a position to negotiate effectively.  By identifying the potential buyers and transferees for your business you may be able to fine-tune the desirable attributes of your business to enhance value for the desired audience. 

A significant part of your exit plan will involve your personal action plan.  This part of the plan should include the specific action steps that you will undertake to accomplish your exit goals.  This part of your plan should include selecting your team of advisors and meeting with them regularly to make sure that they are implementing the tasks assigned to each of them.  Your personal action plan should also include self-review – a specific plan to help you keep the implementation of your exit plan moving forward.

A business action plan will be the main part of any exit plan.  If the plan may include a sale or transfer to employees or to an outside buyer, an audit of the company’s financial statements will be useful.  In some circumstances, such as when a lender will be brought in to assist with a transfer to family members, an audit may be called for as well.  Un-audited financial statements for the interim periods during which the exit plan is being implemented will be useful in providing a measure of the degree to which the value-enhancing objectives are being met.

In addition to the financial statements, periodic management reports that analyze the business’ performance of key metrics or performance indicators will give you, your team of advisors, and your management team timely insights into how well the business is performing relative to your goals.  The key to the financial statements and management reports is the credibility that they will bring to your estimates of your business’ future performance.

The business action plan is the most fluid of all of the components of an exit plan.  The business action plan must change and adapt as potential buyers or transferees are identified, and you must be willing to change the business action plan to anticipate and meet the desires and values of these potential buyers and transferees.

An Exit Plan Should Anticipate Your Absence. 

As an overlay to the entire exit plan, you and your team of advisors must consider what will happen in the event of your sudden absence or the sudden absence of a person who is a key to the business.  Regardless of the time when an eventual exit takes place, all business owners will find a contingency plan that addresses these sudden and unexpected situations useful.  A contingency plan need not be a formal part of an exit plan.  It may be set forth, for example, in a buy-sell agreement among multiple owners of the business.

The contingency plan should be written and it should set forth specific instructions informing important people, such as your spouse, family members, and key personnel about the specific tasks they must handle in the event of your absence.  The exit planning process may trigger the first serious look at a contingency plan for many business owners, but the timing of this trigger does not make it less important.

You Have a Default Exit Plan.

The bottom line is that every business owner has an exit plan – the default plan.  The main difference between your well thought-out exit plan and your default plan lies in which plan will achieve the result you desire.  It is never too early to start planning for your exit from your business, even if you commenced business only yesterday.  As each day passes, external forces such as economic or industry downturns, competitive challenges, unanticipated illness, or disability take control of your exit options and limit your ability to influence the outcome.  In the absence of the thorough analysis that an exit plan entails, how will you be assured that your exit from your business will leave you in a position and with the resources to meet your needs and your family’s needs – not to mention meeting your desires.

Where should you start the exit planning process?  The first step involves discussing your exit vision and your desires with your trusted advisors, including your financial planner, your accountant, and, of course, your attorney.  Many of your current advisors may not be up to the task, and many may tell you that they are not.  You should work together with them to recruit and engage an advisor who you can trust to lead you and your team of advisors through the exit planning process.

        Be prepared to handle the responsibilities of an owner, and be prepared to delegate to your exit planning advisor the responsibilities of a head coach.  Be prepared to work closely with the head coach to communicate your desires and your vision, and then stand back and let the head coach direct the team.  The exit planner should create the play book, assign the tasks to the players, and coach and motivate the team to work together as a unit.  You may even want to share some of the responsibility for completing some of the tasks in the play book.  By working with your exit planning advisor and the other members of your team, you can make your vision of your successful exit a reality.