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.
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 entrepreneurs 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 exit planning process. Instead, each term is a phase or component of the business exit planning process.
Let’s break down its three parts.
Exit planning is a three phase process undertaken by a business owner as he considers transferring ownership to another business or individual(s).
1. What is Transition Planning?
In the first phase of an exit plan, the entrepreneur 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
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 entrepreneur’s personal and business objectives are at odds. For example, if the entrepreneur 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 exit planning process.
Who Do I Need to Create my Business Exit Plan and What Do They Do?
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 to develop a Succession Planning Roadmap that keeps all of the above professionals heading in the same direction!
Holly also founded ExitPromise.com and to date has answered more than 2,000 questions asked by business owners about starting, growing and selling a business.
Latest posts by Holly Magister, CPA, CFP
- Understanding the Business Buyer Types When Selling Your Business - April 12, 2019
- How to Prepare and Include the Business Owner’s Family in the Exit Planning Process - March 14, 2019
- How to Prepare for Due Diligence When Selling a Business - February 12, 2019