Planning for the Most Important Financial Decision
CFO Solutions–NW specializes in working with the owners of privately held businesses on determining corporate growth strategies; comprehensive exit planning; and the eventual sale, merger, or transition of a company to family members or key employees. Linda Ganim helps clients develop their complete plan by focusing on their personal needs and objectives.
We understand business owners are so busy addressing today’s economic challenges that they can overlook the critical task of exit planning. We also understand that, at some point, all owners exit their businesses, and when that date arrives, owners want to exit on their terms—the two most important of which are financial independence and choosing the person or entity that will receive or buy the business.
There are several compelling reasons to create a plan to make this happen. Designing a comprehensive Exit Plan—based on your exit objectives and flexible enough to adapt to changing economic, business, and personal circumstances—can make the difference between liquidating your company and selling or transferring it for millions of dollars.
Let’s look at the characteristics of a good Exit Plan in light of a sad but common story of two hypothetical business owners who failed to plan.
Several years ago, I met with Jim and Tim McCoy, owners of a thriving construction company. What I assumed would be a business planning meeting turned into a we-are-getting-out-of-business-so-how-do-we-do-it? meeting. As successful as they were, the McCoys were tired of navigating the labyrinth of government regulations and paying ever-increasing taxes. Ultimately, the day-to-day grind of running a multimillion dollar company had taken its toll.
For the McCoys, sale to a third party was unfeasible not only because neither brother was willing to remain with the company after a sale but also because they had failed to develop a strong management team. Few savvy buyers will purchase a company without a great management team committed to remaining after the sale.
Transferring ownership to one or more key employees was also out of the question. None had been groomed to assume ownership responsibilities, nor had the McCoys taken action to fund this type of buyout.
Transferring the company to children was impossible because the children of both owners were too young to be active in the company.
The McCoys’ only exit option was to liquidate because their highly profitable company had little worth beyond the value of its tangible assets. After the liquidation sale, dozens of employees lost their jobs, and Jim and Tim left millions of dollars on the table.
How Can You Avoid the McCoys’ Fate?
Plan Ahead. The issues Jim and Tim ignored (among them grooming a management team and failing to plan) proved their downfall. But these and most other issues—if addressed in advance of your exit—can be resolved in a manner that: a) is cost-efficient; b) enables your business to be transferred; and c) adds to the value of your business. In our experience, most owners with Exit Plans need five to ten years to implement all the strategies necessary to exit successfully. Owners without Exit Plans spend far longer than that waiting and hoping for a buyer.
Set Measurable Goals. Your Exit Plan must set goals, provide accountability, and measure results. This is especially important when one goal is to protect and grow value while minimizing taxes.
Incorporate Flexibility. Create a plan with the flexibility necessary to react quickly and effectively when the unexpected happens.
Use a Proven Process. We suggest you engage in a proven Seven-Step Exit Planning Process™ that has helped thousands of owners exit in style. One way to look at our Exit Planning Process is to associate each step with a question. As you progress through the process, you will be able to answer “Yes” to each one.
- Setting Exit Objectives: Do you know your retirement goals and what they will take—in cash—to reach them?
- Determining Business Value: Do you know what your business is worth today, in cash?
- Increasing Business Value: Have you identified the best ways to increase the value and cash flow of your company?
- The Third-Party Sale: Do you know how to sell your business to a third party without getting killed by taxes? (or)
- Transfer Your Business to Insiders: Do you know how to transfer your business to insiders (family members, co-owners, or employees) for cash rather than giving it away?
- Protect Your Business: Do you have a continuity plan for your business should you die or become disabled?
- Protect Your Family: Do you have a plan to secure your family’s financial security should you die or become disabled?
The thought and actions that go into answering these questions constitutes your unique Exit Plan.
If, at any time, you have a question or need assistance with any exit planning issue, I hope you will contact me.
Read our article on how to find out what your business is worth—including the wisdom of valuation multiples and steps you can take to maximize the value of your business prior to selling.
Jim Williams, founder of Sharefaith.com, sold his business earlier this year to a strategic buyer after nearly fifteen years of patiently molding and growing a digital media company in a niche market. Read Linda’s interview with Jim on the process.