What Is Exit Planning?
Keywords: Business, Continuity, Exit, Planning, Estates, Strategy, Finances
To some the answer may be self-evident. But others in the business arena often choose to look the other way and let nature take its course, hoping the problem, if they realize there is a problem, will go away. Some refer to this simply as Succession Planning, which technically means transfers within a family unit; possibly a second generation.
But the term Exit Planning is far more encompassing. An Exit Plan takes into account not only transfers between family members, but a sale to a third party or a transfer to targeted members within a company. If you are the business owner there may be more than one answer to this burning question; what is Exit Planning?
In a nutshell, Exit Planning is a systematic approach for a business owner to transition away from a business on their own terms, not those dictated by someone else, and at the same time maximize the after tax dollars that remain in the owner’s pocket.
Every owner has an Exit Plan. If the strategy is formalized the decision of when to leave the business will be a voluntary. With no plan, the ultimate scheme may consist of someone carrying the owner out on a gurney and the business will simply fold, or at best be worth no more than its assets: real estate, accounts receivables, etc. Either way, someday every owner will leave their business. The choices will be is it on their terms, or someone else’s?
A majority of closely held companies will change hands within the next five to ten years. The unfortunate mistake is that most will not have taken the necessary precautions to prepare for a transition away from an ownership role. That’s the rub. That’s why planning by the owner to leave a business they have poured their heart and soul into, becomes so important.
The reasons for failing to plan are varied. First and foremost owners tell themselves that they are simply too busy. They believe that they are so busy running a business that they cannot make preparations to get out someday. All their efforts are spent working IN a business rather than working ON it. Secondly, an owner may be unsure of where or how to start an Exit Planning process. Who do they see first and just where do they begin? These are legitimate concerns that must be addressed.
The difference between having an Exit Plan, or no plan at all, can mean the difference in a huge amount of cash that will remain on the table, instead of in an owner’s pocket, at the time the business is transferred. With proper information and preparation, those added dollars would be the owner’s when they ultimately decide to leave the business. If the Exit Planning process was started today, they will become the beneficiary of these additional benefits and avoid a sad, and often too common, fate.
So, where to begin? The first step is to make certain that the Exit Plan keeps the owner in complete control of the outcome. Engage an Exit Planning Specialist to guide you along the way. The Exit Planning process should begin by answering a few simple questions. As you answer each of these the planning process will start to take shape.
1. When do you plan to retire, and how much money will you need to live on after retirement?
2. How much is your business worth, in cash today?
3. What is the best way to maximize the income stream generated from ownership in your business?
4. How could you sell your business to a third party and pay the least amount of tax?
5. How would a transfer of a business to family members, co-owners, or employees be made, but at the same time pay the least possible tax and enjoy the maximum financial gain?
6. If something unexpected happens, such as your demise, do you have a continuity plan for your business?
7. If unexpected events occur, have you provided a means to secure finances for those in your family that are left behind?
Answering these questions honestly should cause a business owner to pause and reflect, but requires some action on their part. These appear to be very simple questions but when you dig deeper you will find they are misleading because the answers will be exceedingly vague without someone knowledgeable to guide your path. Creation and implementation of an Exit Plan could be the most important business and financial event of your life.
Dennis L. Hayden CPA, of Hayden Consulting, holds an advance degree in Taxation, a Certified Valuation Analysts, member of various professional organizations, and a published Author. His e-mail is dhayden@Haydenci.biz and phone (317) 809-8920. The firm web site is www.HaydenConsulting.biz
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