Exit Planning: DIY vs. Expert Planning

Some business owners believe that once they understand the basic exit planning process, they can develop and implement their exit plans by themselves. They feel that the idea of bringing in a team of professional advisors is both time-consuming and expensive.

After all, they’ve built a successful business, why can’t they do an exit plan themselves?

The truth is that a business owner could build a personal exit plan. Just as anyone can buy all the ingredients and follow all of the same steps that a Michelin-star chef uses to create a high-quality dish, a business owner can gather all of the tools and follow the steps of creating an exit plan.

But without specialized training, a deep understanding of each nuance, and the patience and discipline to adhere to the process even when things go awry, any attempt at recreating a Michelin-star meal or creating an expert exit plan will leave both stomachs and wallets emptier than need be.

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We will lay out the differences between DIY planning and expert planning.

As owners or advisors create an exit plan, they must collect five important pieces of information:

• The owner’s target departure date.
• A preliminary Financial Needs Analysis.
• The owner’s desired successor.
• A preliminary valuation of the company.
• A future cash–flow estimate.

Let’s look at the differences between DIY and expert planning in several different areas of exit planning.

The Owner’s Target Departure Date

While creating an exit plan, it is important to have an idea of the timing the owner has in mind. If the owner can’t provide a time frame for leaving the business, the exit planning process will flounder. Without a stated departure date, no one can create a road map to a successful exit.

DIY Planning

When owners try to implement DIY planning, we find that they often fall prey to the “five-year rolling exit plan.” This occurs when owners push back their target departure dates because their plans hit a snag, the business requires the owner’s undivided attention due to an emergency, or the owner cannot find a buyer who will pay what the owner wants. The target of transitioning out in “five years” quickly can become 7–10 years.

Expert Planning

The professional exit planner keeps things moving forward by using a holistic approach to the process. Exit planners know which advisors can fix a problem and what can be done to keep things on track. They know that continually moving the departure date back will undermine the entire planning process. They can keep the business owner focused on the target.

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A Preliminary Financial Needs Analysis

Any comprehensive exit plan requires a Financial Needs Analysis, prepared by an appropriate professional. This analysis helps owners set and assess their financial and personal objectives. This analysis is NOT a financial plan. It makes no investment recommendations. It will tell owners and advisors how much money the owner must receive from the transfer of the business to achieve financial independence. As such, it is critical in determining the design and timing of the owner’s exit.

DIY Planning

The DIY owner will overlook things, especially if that owner isn’t a financial professional. A few seemingly small omissions here and there can turn into a significant gap in sale proceeds, which can affect the owner’s quality of life in retirement. Additionally, most owners have limited access to appropriate financial advice and may be hesitant to even ask for it.

Expert Planning

Exit planners know which issues are important. They have templates and lists to refer to. Based on their experience and understanding, they can do a Financial Needs Analysis that correctly states what the owner needs from the sale of the business. Expert exit planners can give owners the peace of mind of knowing that they have prepared for the most realistic scenario regarding their financial needs. Owners don’t want to leave this item up to chance.

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The Owner’s Desired Successor

Owners and advisors need to know the owner’s most likely choice to create a strategically focused exit plan. The number of possible successors is limited. There are advantages and disadvantages to each choice:

1. A child or children (or other family members).
2. A co-owner or co-owners.
3. One or several key employees.
4. An unrelated third party.
5. An ESOP (Employee Stock Ownership Plan).

DIY Planning

Commonly, DIY owners cannot see the pros and cons of each possibility because they are too close to the action. They may want to sell to a specific successor regardless of the downsides. This myopic view could spell disaster.

Expert Planning

As the business owner’s Chief of Staff, exit planners can advise owners on better choices if their first selections could be troublesome. As a disinterested third party, exit planners take a long view of the situation. They don’t have any sentimental preferences, making their advice especially valuable if the successor is a family member.

A Preliminary Valuation of the Company

A preliminary valuation of a company, prepared by an appropriate professional (CPA or CVA), gives advisors and business owners a fairly good idea of how much a company is currently worth. Knowing company value allows owners to receive full fair market value when they leave. The valuation also tells the advisor and owner how much business growth needs to occur to meet the ultimate financial objective at the departure date.

DIY Planning

Many owners will use hearsay and incomplete information to value their companies. This self-determined value could be significantly higher or lower than the real value, causing owners to either expect too much or sell short.

Expert Planning

Exit planners can provide advice and counsel, coupled with the professional advice of a valuation specialist, to assure that the sale price is realistic.

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A Future Cash–Flow Estimate

Advisors and owners must estimate future cash flow as they create an exit plan. A professionally prepared cash-flow forecast helps advisors and business owners assess the likelihood of success of various Exit Paths. It also prevents the exit plan from running into dead ends and establishes the exit plan’s financial credibility.

DIY Planning

Business owners are experts in running successful enterprises. Their experience in forecasting cash flow accurately may be limited. There are many facets to consider, from the general viability of the marketplace to the availability of raw materials used in the manufacturing process. The process is as much art as it is science.

Expert Planning

Exit planners use tools and financial resources to assemble a realistic forecast. They look at things the business owner wouldn’t begin to consider. In short, the advisor will produce an accurate, authentic report that a buyer will accept more readily than one produced internally.

The business owner may think that going it alone will be quicker and more economical than bringing in a team of professionals. The truth is that the team can save time, money, and confusion.

Exit planning professionals are a business owner’s best source of good advice. Help make your clients’ exit planning experience smooth and cost-effective.