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Exit Planning: 5 Critical Elements of a Successful Exit Plan

Exit planning is a holistic approach to designing a business-exit strategy that provides a business owner maximum value for their life’s work.

It encompasses setting exit objectives:

  • When do you want to leave?
  • How much money do you need from your business exit?
  • To whom will you sell the business?

It is never too early to start. The optimal timeframe for starting your exit plan is 5-8 years before you plan to transition. The plan is flexible and can be adjusted along the way. It is more than thinking and talking.

It is taking the actions necessary to enable attainable exit objectives. Exit planning takes time. The farther in advance you start planning for your exit, the more options you have and the better the outcome is likely to be.

First: Recognize that when owners have a passive attitude toward the irrefutable fact that they will—one way or another—leave their businesses someday, they are settling for less than the most successful exit for themselves and their families.

Second: Understand that preparing and transferring a business takes time - on average 5 to 10 years. The more time owners have to design and implement their plan, the better the outcome will be. Now’s the time to put a stake in the ground and start planning. The date can adjust as needs change, but you need to start somewhere.

Get Started With an Assessment

The first step in a successful transition strategy is determining where you are in the process. Assessment reports don’t diagnose problems that business owners have, but they reflect to the owner what he or she cares about most relative to a business exit.

Using the assessment will help owners determine what is most important to them and by starting well before the anticipated exit date there is time to address the most pressing issues. The assessment is the basis for a customized action plan to address the unique goals, interests and concerns for each business owner.  

Five Critical Elements of a Successful Exit Plan

After assessing where you are in the process, your advisor will develop a customized exit plan that focuses on five main areas.

1. Target Departure Date

You simply cannot create a road map for your successful exit without a stated departure date. We suggest that you set that date by asking yourself questions designed to help you establish a time frame for your departure. You can design your own departure in terms of when it occurs and how your involvement with the business changes and evolves. If you cannot visualize a future that is different from today, this is likely your starting point. Without a definition of what “departure” means to you, your exit planning will lack traction.

2. Preliminary Financial Needs Analysis

Any comprehensive exit plan requires a preliminary Financial Needs Analysis. This analysis will help you to set and assess your financial wants and needs. The Financial Needs Analysis is not a financial plan. It simply tells you how much money you must receive from the transfer of the business in order to achieve financial security and independence. It is a result of a thoughtful review of your lifestyle, changing financial needs, non-business income streams and other factors. This element does require the assistance of a qualified professional.

3. Target Successor

It’s your business and most business owners expect to control who will take on the ownership interest in the future. Your exit plan should reflect your successor owner preferences, whether you prefer that your ownership transfers to a family member, co-owner, one or more employees or an unrelated third-party buyer. Each target successor requires a different approach to exit planning. Identifying a successor owner sets you on a path for planning and preparation to accomplish all of your objectives.

4. Preliminary Valuation

A preliminary business valuation, prepared by an appropriate professional, gives you and your exit planning team a reliable idea of how your business will contribute to your financial goals. Once you have a sense of what your business is worth, you can work toward exit planning solutions that allow you to receive full value for the business. Don’t worry if the value of the business does not support the value you require based on your Financial Needs Analysis – that will just mean that your exit plan will emphasize value building as part of the comprehensive solutions and strategies.

5. Future Cash Flow Estimate

Cash flow drives your current income as a business owner. It will also fuel your continued ownership and your ultimate departure. A professionally prepared cash flow projection helps you and your advisors evaluate the likelihood of success of various exit paths. It can also prevent the exit plan from taking a wrong turn and establishes the financial structure on which you build your Exit Plan.

*Source: Business Enterprise Institute, Inc.

Time to Get Started

Exit plans consider your personal values and which aspects of the business are important for your successor to continue to maintain. Using your goals and financial situation as bedrocks, a solid planning process will respect your values-based goals and find successors that are willing to commit to those values most important to you.

Planning also allows for adjustments to events that might negatively affect your business, such as economic downturns or changes in the competitive environment, which in turn affect cash flow.  The time you spend planning ahead will help minimize risks later.

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© 2019 Business Enterprise Institute, Inc. All rights reserved.

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Biz Tip Topic Expert: Nancy Mehlberg, CVB, EA

Nancy Mehlberg, CVB, EA

Nancy is a Principal with SVA Certified Public Accountants and helps clients improve their company profitability and protects their interests by clearly understanding their future goals. She works closely and proactively with clients with an emphasis in business and income tax planning and financial reporting.

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