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Exit Strategy – Advance Planning Adds Value

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Exit Strategy – Advance Planning Adds Value
 
Edward L. Fixen, President
BusinessQuest
 
As the economy slowly improves, now is a great time to take stock and put an exit plan or strategy in place to increase the future value of your business and enable you to exit the business under your own terms, whether you plan to sell next year, five years or have no plan to sell for the foreseeable future.  Many business owners mistakenly think an exit plan is only needed for those planning to sell in the immediate or near future.  Actually, an exit plan is just as critical and perhaps even more valuable for an owner with no intentions of selling anytime soon.  Events such as death, illness, divorce or burnout are not planned but can force the untimely and costly sale of a business if appropriate contingencies are not planned in advance. 
 
Even if you are fortunate enough to avoid an unplanned sale, an exit plan should only help to improve the performance of your company until such time as a planned sale is completed.  An exit plan is a great opportunity to examine and understand the following:
 
·        Financial needs and goals when you do sale or retire
·        Value of your business today and potential contribution to your future plans or retirement
·        Opportunities and strategies to increase the value of your business to meet your financial goals
·        Steps to prepare your personal and business matters to minimize or defer capital gains and tax liabilities from the sale of your business
 
A well conceived exit plan will help you understand the key value drivers of your business and provide a clear path to grow your business in a way that adds value to reach your goals.  In the most simple of terms, an exit plan helps a business owner get more and keep more financially.
 
It has been reported that less than 28% of privately held businesses are estimated to have a business exit plan, despite the reality that exiting your business is a certain outcome for every business owner.  Fortunately, the time and cost associated with a well prepared and executed exit plan is marginal compared to the value.
 
What Is An Exit Plan?  An exit plan is really the final chapter of a well written business plan.  A business plan provides a road map for achieving various operating and financial goals during the life of the business.  An exit plan identifies in great detail, the last mile of the business plan road map regarding the steps an owner of a business should take to achieve personal and business financial goals when it comes time to exit and sale the business.  A complete exit plan addresses business, personal, financial, legal and tax related issues involved in the sale of a business.  A well executed exit plan will enable an owner to:
 
·        Control how & when to exit the business
·        Have contingencies for illness, burnout, divorce and even death       
·        Allow continuity of the business
·        Minimize, defer or eliminate capital gains taxes
·        Achieve financial & personal goals
·        Maximize company value in good times and bad
 
How To Get Started.  The first step of an exit plan should be to develop a benchmark, fair market valuation and operational/organizational assessment of your business today.  This initial valuation and business assessment will provide the basis of your company’s market value today and provide very specific and tangible recommended steps from a financial, operational, management and organizational perspective to improve the value of your company.  This information will also enable a business owner to determine if current business conditions will meet personal/family financial needs after the sale of the business or if improvements identified in the analysis should be pursued.  The benefit of this first step is that not only are you identifying ways to improve the value of your business and developing the foundation for an exit plan, you are also getting a professional business analysis which is very beneficial regardless of when you sell.  A tangible product of this first step should be a business valuation and assessment report identifying and recommending steps to increase the value of the business to meet your stated goals.
 
Depending on the size of your business and the complexities of your business and personal investments, the next steps might involve a multi-disciplinary team of one or more professionals consisting of financial advisor, CPA, estate planner/attorney and business attorney to develop a comprehensive exit plan.  
 
What Is The Value Of An Exit Plan?.  Given enough time to work, an exit plan should help reduce capital gains taxes, increase the sale price and as a result significantly increase the net proceeds that you have to invest after the sale.  Case studies cited by the Exit Planning Institute have shown a return of 100% plus on the investment required to develop an exit plan.  Depending on the value of the business, a good exit plan can translate into savings up to several hundred thousand dollars or more after exit plan costs.
 
When Should You Get Started?  It is only natural not to think about selling your business until you are ready to retire or move on to a new challenge in life.  However, since it takes 9 to 12 months on average to complete the sale of a business once you have completed the pre-sale business valuation/preparation and you will likely be expected to have a continued involvement in the business for some time period after the sale, you should begin the exit planning and preparation process three to five years before you actually want to exit the business.
 
Whether you are planning sell your business next year, three years, ten years or have no time table, now is the perfect time to start planning, building value and putting your exit strategy to work.
 
Author: Mr. Fixen is a Certified Business Broker (CBB) and an Accredited Business Appraiser (AIBA).  Mr. Fixen is the President of BusinessQuest, an M&A brokerage and advisory firm serving small & mid size, privately-held businesses throughout California.  Mr. Fixen can be reached via email at Ed@BusinessQuestBrokers.com .