LEAVING BEHIND. HAVING AN EXIT STRATEGY IS CRUCIAL

I learned from Dave Sullivan, the business consultant who for years taught the Course for Presidents at Aileron, that in business one should never start an enterprise without at the same time designing an exit strategy. Dave Sullivan wants you to ask yourself: How do I extract myself when it does not pan out, when I find that I have more important things to do, or when calamity strikes? More precisely, how do I extract myself without doing harm to the business, its stakeholders and my estate?

The typical small business owner has ninety percent of his/her net worth tied up in the business and is relying on the value of that investment to fund his/her retirement.Yet, a preponderance of small business owners will be in for a shock when they try to sell or have their business valued for estate planning purposes. This is particularly the case with businesses that do not carry substantial hard assets like land, property and machinery on their balance sheets. There is a rule of thumb that says that 60% of the valuation of a business depends on the general state of the economy, 30% on Wall Street’s outlook for the industry it operates in and only 10% on the financials of the business itself. This suggests that timing of exiting a business is all important.

As Dave Sullivan points out, exit planning should not wait until you begin to feel ready for retirement. In fact, business owners would do well to separate exit planning from retirement planning. Otherwise the presumption is built in that the business owner will not voluntarily exit from the business until retirement. The exit planning Dave Sullivan is talking about is having a plan for what to do with the business when it no longer meets the owner’s goals, whether these goals are of a business nature or a personal nature. This can happen at any time in the owner’s lifecycle and in the business lifecycle.

Such exit plan should look at all alternatives for the business, including liquidation, retaining ownership but leaving the day to day operations to others, becoming a silent owner, selling, transitioning to the next generation, turning it into an employee owned business, merging it with another business, you name it.

Not all of these options may be valid at every stage of the business development or under all circumstances. Therefore the exit plan should be written as a “what if” scenario:

·         What if in five years I cannot achieve my return on assets goal?

·         What if my health fails me and I no longer have the stamina to lead the show?

·         What if I come across another business opportunity with higher earnings potential?

·         What if I want to go back to school or change careers?

·         What if a family member needs my full time attention and care?

·         What if I discover that others are better equipped to run the show than I am?

·         What if I want to retire?

A carefully considered exit plan is an indispensable business and personal planning tool. It will stimulate the business owner to maximize the value of the business independent of his/her level of participation in the business. It is also an expression of good governance as it protects the value and continuity of the business for other stakeholders, particularly heirs, employees, customers, suppliers and –if applicable – minority shareholders.

A good exit plan is a direct reflection of how the owner sees his/her role in the business. If he/she is a veritable entrepreneur the plan will focus on scenarios that will call for an early exit or distancing from management as other opportunities arise. If he/she is a business owner to have job security and make a decent living the plan will focus on retirement. If he/she wants to be the Chairman of the Board but not the CEO the plan will focus on separation of powers.

For small business owners wanting to create an exit plan there is plenty of professional counsel available. The first source to go to is The Exit Planning Institute (E.P.I) www.exit-planning-institute.org . The institute is responsible for the certification of “Certified Exit Planning Advisors”. Its web-site is a treasure trove of information on the topic of business exit planning.E.P.I. points to the damage owners can do to themselves, their heirs and the business when failing to have a well designed and implemented exit plan:

·         Undervalue your company leaving hard-earned wealth on the table

·         Pay too much in capital gains and estate taxes

·         Lose control over the exit process

·         Fail to realize your personal, financial, or business goals during the exit process.

A good exit plan is written with the input of professional counsel. My experience with small business owners is that too many are living dangerously without a good exit plan. They do so at their own peril but they need to be aware that, in the process, they are also exposing all stakeholders in the business to unnecessary risk and harm. What they are leaving behind is a mess.