The exit planning process ensures business owners could leave their business and create a smooth transition to the new ownership.

A major food industry supplier to small independent grocery stores began working with investment bankers in the late 1990s to assess the state of the food industry. At that point, the family owned business was highly successful, the father was enjoying the benefits of being a leader in the local community and his two sons were up and coming in the business. Life was good and it would have been easy for the family to continue on with their comfortable lives.

Wisely, the family knew the winds of change were in the air. They began to consult with investment bankers to evaluate the state of their industry. Instead of inward-focused thinking on what was good for the family, they began to look at their company as shareholders. According to the investment bankers, small independent grocery stores were beginning to struggle. Giants like Wal-Mart superstores were giving the independents a run for their money. The owners knew the trends were too powerful for them to reverse. After much soul searching, the family decided to sell the business to an even larger company.

While not all decisions to sell are this well thought out, the owners were well-prepared for the sale when it took place. Indeed, as many business owners evaluate the state of their industry, it could be time to think about getting your business ready for a sale, and for good reasons. For sellers of small to medium-sized businesses (usually between $10 and $100 million in sales), the market is the best it has been in 25 years. On average, mid-sized businesses are worth 30 to 40 percent more today than they were only three years ago, and many owners are taking advantage of the optimal conditions to sell their companies.

Whether selling a business to a third party or key employees or transferring it to family members, the decision to sell and to whom to sell can be difficult.  This is where the exit planning process comes in.  The purpose of exit planning is to ensure that, when you are ready, you can leave the business on your own terms and schedule. It helps owners make decisions throughout the exit process and helps create a smooth transition to the new ownership. 
No two exit plans are identical, but they should share common steps that guide the process.

STEP 1: EXIT OBJECTIVES
“When a man does not know which harbor he is heading for, no wind is the right wind.” – Seneca.

Seneca was, indeed, a wise philosopher. His advice is as sound for business owners today as it was centuries ago. Although difficult, setting specific exit goals allows an owner to leave a business on his or her own terms and feel confident about leaving in style.

There are three basic retirement objectives every owner must establish:
1. How much longer do I want to work in the business before retiring or moving on?
2. What is the annual after-tax income I want during retirement (in today’s dollars)?
3. To whom do I want to transfer the business?  Family? Key employees? Co-owners? An outside party?

No owner can effectively leave his or her business without establishing each of these objectives. Many owners set other objectives, as well, such as providing for key employees, transferring wealth to family members or giving to charity.

Remember, the objectives you set in this step control all future planning efforts and strategies, so it is critical to address all of your needs and concerns.  Although the process may seem overwhelming, owners need not tackle it alone.

Only you know how long you want to work or to whom you wish to transfer the business, but an insurance or financial advisor can help crunch the numbers. He or she should be able to help create a financial retirement model to help set retirement financial goals.

STEP 2: VALUATION
A business is typically either an owner’s most valuable asset or the asset that is best able to generate the value needed to meet retirement goals – or both. Frequently, the business comprises between 65 and 90 percent of an owner’s assets. Financial security depends on converting that asset to cash, so it becomes crucial to know how much the business is currently worth. This will tell owners whether they can realistically meet the goals set in Step 1 or how much they need to grow the business to reach their objectives.

Although many owners have a rough idea of what they believe the business is worth, it is always advisable to get an independent valuation. Options include:
• A certified valuation specialist
• An independent CPA firm
• The business’ regularly retained CPA firm
• An investment banker or business broker

Consider using a valuation specialist to determine business value for planning purposes and for transfers of business interest to insiders such as family members, employees or co-owners.

If, however, the business is to be sold to an outside party, consider using a business broker (if your business is worth less than $1 million or $2 million) or an investment banker (if your business is more valuable). These advisors are in a better position to properly assess the likely sale price of your business.

STEP 3: MAKE THE BUSINESS MORE VALUABLE
In this step, owners should identify specific, realizable steps to preserve, promote and protect the value of the company through the exit. As prospective buyers investigate your company, they will want both proof of past success and assurance of continued success. Having concrete plans in place to keep the business going through the transition to new ownership increases the value of your company.

Consider factors such as:
• Motivating and retaining key employees
• Maintaining and consistently increasing cash flow
• Creating and using efficient systems
• Documenting the sustainability of earnings

STEP 4: EXPLORE SALE TO A THIRD PARTY
Selling a business to an outside party is often viewed as the best option for maximizing financial objectives in an owner’s exit, but this is not always the case. 

The key to investigating and completing a sale to a third party is an experienced transactions advisor – a business broker or investment banker. Not only should this person be able to evaluate the marketplace and accurately assess your business valuation, but he or she should also be experienced at creating controlled auctions, from pre-sale planning through marketing, negotiating, documentation and closing.

STEP 5: EVALUATE TRANSFERS
Almost 75 percent of all business transfers are to inside parties, yet these transfers are the most complicated because insiders usually have the weakest financial (cash) resources to effect a buyout and are the most tax-sensitive (especially for family members facing estate tax issues). For this reason, owners must evaluate the dynamics of selling to an inside party against tax implications and the owner’s need for financial security.

Because inside parties, children or key employees generally  have no cash, the only way you as the owner will receive your purchase price is to receive installment and other payments (directly from the company) over an extended period of time. All the money you receive will come from the future cash flow of the business; that is, income the business earns after you depart. Therefore, it is imperative that the tax consequences to the business and to the buyer be minimized in order to preserve a greater part of the company’s cash flow for the departing owner. Similarly, the deal must be structured to maximize your security because it will take an extended period of time to receive the full purchase price.

Several techniques can be used to minimize income tax consequences to buyer and seller, including minimizing ownership value of the business; creating unfounded obligations (e.g., non-qualified deferred compensation, licensing and royalty fees); or transferring excess accumulated cash within the business prior to the sale. Your tax advisors, business attorney and investment banker, if experienced in the area of business transition planning, are your best sources for help with a transition to insiders.

STEP 6: DEVELOP A CONTINGENCY PLAN
Creating a continuity plan for the business to guard against the death or disability of the owner is crucial because no exit plan can stay on track if the owner’s unexpected absence is not addressed. The continuity plan tackles issues such as ongoing capital needs of the company, allowance for changes in decision-making systems, and specific actions to be taken with the balance sheet and operations.

A contingency plan should be a written plan that answers the following questions:
• In my absence, who can be given the responsibility to continue and supervise business operations? Financial decisions? Internal administration?
• How will these people be compensated for their time and, most importantly, for their commitment to continue working until the company is transferred or liquidated?
• Should the business, at my death or permanent incapacity, be sold to an outside party, sold to employees, transferred to family members, continued or liquidated?
• Who should be consulted in the transfer process described above?

STEP 7: MAXIMIZE VALUE
The final step is to make sure the exit plan and an owner’s estate plan are in sync, making sure there is a contingency plan for the owner’s family. This includes checking that the income/wealth needs of the family (spouse and heirs) can be adequately met within the parameters of the exit plan and that the exit plan ensures the equitable distribution of assets.

It also involves reviewing the income/wealth needs for tax efficiency purposes. Life insurance and disability insurance play tremendous roles in this step, and your estate planning attorney and insurance advisor can assist with planning and calculation.

SEALING THE DEAL
The techniques that produce operational business success do not guarantee a successful business departure. Most business owners only leave once, so there is little room for “trial and error.” Once most owners begin to think about leaving, they want out sooner, rather than later.  To do so, owners need an effective exit plan, experienced advisors and time.
To orchestrate a successful exit, your exit plan should be in written form and should include an action checklist. This checklist describes each action to be taken at each step of the exit process. It assigns responsibility for each task to a specific advisor and specifies a date by which this action must be completed.

Armed with these written tools, a team of skilled and experienced advisors, and (ideally) several years, you optimize your chance for leaving your business in style.

Brent Baxter is a founding partner of Clayton Capital Partners, a St. Louis-based investment-banking firm that provides merger and acquisition advice to mid-market business owners. For more, call 314-725-9939, e-mail This e-mail address is being protected from spam bots, you need JavaScript enabled to view it or visit www.claytoncapitalpartners.com .