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According to Wikipedia, Exit Planning is the process of preparation for the exit of an entrepreneur from his company while maximizing enterprise value, and thus his shareholder value, during the mergers and acquisitions transaction.
Other non-financial objectives may be pursued including the transition of the company to the next generation, sale to employees or management, or other altruistic, non-financial objectives.
In simple terms, exit planning is a three phase process undertaken by a business owner as he considers transferring ownership to another business or individual(s).
A variety of terms are used by professionals and business owners alike to describe business exit planning. They may include: transition planning, exit strategy, and succession planning. None of these terms define or encompass the full business exit planning process. Instead, each is a phase or component of the business exit planning process.
Let’s break down its three parts:
1. What is Transition Planning?
In the first phase of an exit plan, the business owner initially devotes resources to improving the value of his business in the eyes of a prospective buyer or new owner. It is logical to believe a prospective buyer or new owner will pay more for a business if it is profitable over time. Accordingly, growing the business and increasing its profitability in the three-to-five years preceding its sale makes good financial sense. Various measures of profitability are used in the transition planning process including: EBITDA, EBIT, and Enterprise Value. These measures are also used when the business is sold or transferred to a new owner.
Proactively preparing the business for buyer’s due diligence during the sale process is also part of the transition planning process. Likewise, taking steps to protect the relationships a business has with its customers, employees, and suppliers is necessary during the transition planning process.
A thorough transition plan for most businesses takes one-to-two years to accomplish. In phase two of the exit planning process, the entrepreneur’s exit strategy should be developed.
2. What is an Exit Strategy Plan?
In order to develop an exit strategy, the entrepreneur must consider his own personal objectives which may include financial goals, business culture, and/or matters of legacy. Each entrepreneur wants to keep his exit promise on his own terms. So the development of the entrepreneur’s exit strategy involves matching the “right fit’ new owner with these objectives.
There are a variety of paths to exit business ownership and they include:
- Sale to a Third Party
- Sale to Co-Shareholder, Partner or Co-Member
- Sale or Transfer to Insiders or Management Buyout
- ESOP – Employee Stock Ownership Plan
- Sale or Transfer to Family Members
- Investment from Venture Capital Firm
- Investment from or Sale to Private Equity Firm
- Investment from Mezzanine – Convertible Debt and/or Equity
- Liquidation
- Bankruptcy
Each of the exit paths noted above have different tax consequences and all may be structured in a variety of ways. Estate and tax planning is imperative during this phase of the exit planning process.
There are times when the business owner’s personal and business objectives are at odds. For example, if the business owner wants the new owner to keep the business in its present location while receiving top dollar for its sale, discussions with an international buyer willing to pay a higher price and with intentions of plant relocation would not be a ‘right fit’. In this example, the top dollar sales price objective conflicts with the desire to keep the business in the same town post sale.
The development of various exit strategy scenarios allows an entrepreneur to begin thinking realistically about potential buyers or new owners in the context of his personal objectives, before the selling process commences. This effort saves precious time and resources when the business ultimately is put up for sale or is transferred.
3. What is Succession Planning?
This third, and very important phase in the exit planning process, addresses the need to replace any owners and/or management team members who may exit the business after the sale or transfer occurs.
It also should include business continuity planning or contingency planning in case something tragic happens to the business owners and leaders before a business is sold or transferred to new owners.
Succession planning is vital for the longevity and long term financial success of the buyer. Replacing executive-level talent is not as simple as hiring new employees. In many cases, the business owners and executives hold extensive knowledge and, without proper succession planning and its careful execution, the business may ultimately fail.
What is Exit Planning — FAQ’s
When Should I Develop My Business Exit Plan?
As odd as this may sound, you should begin your exit plan when you start your business. The first part of the exit planning process involves growing a profitable business that would be attractive to potential buyers or new owners. Growing a profitable business from day one means you are always in a position to exit your business. Likewise, developing business habits that make your business due diligence proof and protect your valuable business relationships contribute to having a healthy business.
Having said that, if the exit plan has not been started a three-to-five year period is an ideal time frame to start the exit planning process to sell or transfer to a new owner.
How Do I Know I am Ready to Exit my Business?
You don’t know. And that’s the problem. Exiting a business may not be optional. You may suffer an accident or debilitating illness and be forced to exit. There’s no time like the present to begin the business exit planning process.
Who Do I Need for Business Exit Planning?
Just as It Takes a Village to Sell a Business, it takes various resources to create and sustain an exit plan. A few of the resources needed include:
- Business Transaction Attorney – to offer advice regarding tax and estate planning matters and to prepare critical documents
- Certified Public Accountant – to calculate business tax basis, prepare financial and tax projections
- Financial Planner – to prepare cash flow projections for personal budget/needs post sale or transfer
- C.F.O – to assist with business budgeting, projections, and financial reporting
- Exit Planner – to educate, guide and facilitate the Transition Planning phase; to develop the Exit Strategies; and to develop a Succession Planning Roadmap to keep all of the above professionals heading in the same direction!
What do the Exit Planner Designations for Advisors mean?
There are several organizations associated with the exit planning profession. For many business owners, the organizations’ respective designations and membership acronyms are confusing. So, it may be helpful to clarify further:
The Business Enterprise Institute (BEI) offers advisors training, marketing support, planning software and a network of like-minded advisors for collaboration purposes. An advisor in the BEI organization may participate at any level they desire and do not need to attend training or be tested for competency to be a member of the organization. The BEI organization also offers advanced exit planning training course where the advisor may earn his or her CExP designation, which stands for Certified Exit Planner.
The Exit Planning Institute offers advisors two levels of membership once they’ve taken the 5-day course and passed their CEPA (Certified Exit Planning Advisor) designation test. The basic membership covers the CEPA designation where the second lever offers its members additional tools for marketing and professional development.
The Exit Planning Exchange is a member-based organization of multi-disciplinary professional advisors. The XPX organization has various groups of advisors who meet in local chapters across the United States. This organization does not offer its members training or certification. Instead, its focus is on member networking.
Conclusion
Unfortunately, the business exit planning process and profession can be quite confusing — to both business owners and the professional advisors. That’s in part because the profession is relatively new so the terms, exit planning steps, and designations are not clearly defined.
If you are searching for an exit planner for your business, ask every advisor your meet, whether they hold a certification as a business exit advisor or not, about their experience in the field. What have they actually done with real business owners? Have any of their clients sold or transferred their business to new owners and how did the work they did with the client influence their outcome? Ask for specifics.
A well-seasoned, successful exit planner will have many examples to share with you and be willing to provide you with their names as a reference!
Hello,
I am interested in taking over an existing swimwear store that I’ve managed for the past 15 years. The owner is elderly and is unable to keep up with demands of running the store. My intention is to purchase select merchandise from her, renew the lease in the existing storefront in my name, and incorporate my own business name. I would love to keep the name of the store, however I don’t want to be held responsible for any debt associated with the corporation name. Since I am not purchasing the business itself just the merchandise, are exiting procedures the same and as in depth as if she were selling the business to me?
Hi Karlyn,
I highly recommend you hire an experience business attorney who works with M&A transactions.
That said, I can offer you my thoughts based on my M&A experiences as an advisor to business owners.
When you buy a business, you’re either buying the entire business (aka a stock purchase) or you’re buying parts of the business (aka an asset purchase).
The exiting process for the business owner (and the buyer) is very similar, regardless of which path you follow. You both have a lot of work to do to do it correctly.
You’ve described in your question a scenario that looks as if you intend to pursue an asset sale. In such a sale, it’s possible to acquire the brand name of the business in addition to the inventory and lease assignment.
Again, you will need a seasoned M&A attorney to help you so you do not inadvertently assume the business’ liabilities too.
All the best…
Hello,
I’m 68 and ready to sell an established small service business I started in the late 90s. I think approaching a competitor has definite potential. But I’m stymied. As basic as it sounds, how do I approach them?
Thumbnail: We perform property inspections for home buyers and sellers in a metro market. Gross sales of $850k and 10 employees. Approx 3% market share. Sub S corp.
We have solid systems in place and the day-to-day is run by two team members.
I’ve been thinking about selling for several years. But like many, plans were delayed by Covid. We’re still feeling the impact.
At 68 I don’t want to finance a prospective buyer so last fall I had a valuation done by a certified business appraiser. My understanding is that’s one of the things the SBA would require for a loan pkg.
… I could opt to step to the sidelines and hold onto the business for a few more years but my gut tells me it’s time to sell.
… I haven’t told my employees although they know I want to reduce my involvement. To my knowledge, none of them are potential buyers.
So back to my original question . My attorney and NDA are ready. And I doubt competitors will be surprised that I want to retire. What would be the best approach to take when I approach one of them?
Thanks in advance for your insight.
Hi Vicki,
My advice would be to be careful. Very careful.
Here’s a post on this very subject: Selling Your Business To a Competitor
I’d be please to chat with you further, if you’d like. Here’s my calendar to set up a call.
HI Holly,
I completed as asset purchase sale of my company on Wed (Feb 5). All documents were signed and both buyer and seller satisfied with the completion of the deal.
My attorney is acting as escrow agent. He wired the necessary funds to the broker per the closing statement, but now will not wire me my proceeds. Says he would like to make an adjustment to cover his bill, which we do not currently agree upon. So he’s holding up the wiring of funds to us.
Is that A)legal and B) ethical?
Thanks.
Hi Patti,
I am sorry you’ve experienced this while selling your business.
Whether it’s legal to do what your attorney is doing, unfortunately I don’t know.
The first place I’d look is at the engagement agreement you signed when you hired your attorney. That agreement should spell out the terms for the legal fees you were responsible for.
If you don’t get any satisfaction with the matter, you could always consider filing a complaint with your state’s Attorney Disciplinary Board.
Hope this helps a bit…
want to dissolve existing corporation, but transferring all debts to new corporation to continue paying and relocating to a new facility
will the bank allow me to move my debt to a new corporation ?
Hi mei,
A clue to the answer to your question may be found in your bank loan documents.
Many banks lend money to the individual business owner and not the corporation or business they own. In that case, the loan may be transferable.
On the other hand, banks often lend the business money and have the individual who owns the majority of the stock personally guarantee the loan. In such case, the bank would likely want the loan to be paid off and ask the owner to apply for a new loan under the new corporation.
Hope this helps a bit…
I sold my shares in an S-Corp five years ago to my business partner at the time. The business had a 15 year lease and an SBA loan, both personally guaranteed. I was recently notified by the bank that the company defaulted on the loan. Our buy/sell had a provision that the company would agree to indemnify, defend, and hold me harmless against any personal guarantees that may arise. Now they are requesting me to satisfy the defaulted loan. What recourse do I have in this scenario since I’m no longer affiliated with the company?
Hi Ryan,
Any recourse you may have would be something you will need to explore with an Attorney well-versed in corporate, M&A and lending matters.
You should reach out to the Attorney that represented you in the sale of your business to your former business partner. He or she should be able to assist you with this matter.
If that’s not an option, we’d be pleased to make an introduction to legal counsel. Simply complete this short form and we will make the connection for you.
I am very sorry you are facing this situation and truly wish you the best as you resolve it.