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.
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