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Your guide to crafting a successful exit plan

Thought Leadership on Exit Planning presented by Stony Hill Business Brokers

The exit planning process has many stages and can often take years. The purpose is to prepare the owner for exit and to maximize the company’s enterprise value in a mergers and acquisitions transaction. In addition, other non-financial objectives may be part of the planning process, including a transition to the next generation or sale to employees or management.

To achieve their desired outcomes, business owners should focus their attention on exit planning from the beginning of the investment to reduce the risks for an eventual new owner and market the businesses more effectively for sale. Significant value is lost due to inadequate exit planning. Approximately half the small- to medium-sized businesses in the U.S. will be transferred to a family member or to employees. The other half will be liquidated or sold to a third party. In every case, the transition will be enhanced by exit planning.

The first stage of an exit plan should be focused on goal setting. At an early stage of a new business, the goals will be very subjective and likely to change over time, but they should include:

  • A desired date to effect a transition
  • The kind of value you want/need to make the exit financially successful
  • Your wishes for staying involved during the transition
  • Whether you want the transition to be to a third party or someone close to you

This stage can be accomplished without the help of an advisor, but an exit planning advisor can be helpful to expand the horizon of the thought process.

The second stage of the exit planning process involves various financial considerations, from the value of the business to income tax considerations. This stage requires a formal business valuation. With the knowledge of what your business is worth, it is possible to analyze your overall net worth and begin working on your retirement plan with your financial advisor. In addition to business aspects, personal considerations need to be thought about, including estate taxes, capital gains taxes and other taxes. To understand the various tax considerations, consult with a tax accountant or attorney.

The third stage of an exit plan involves working with an exit planning advisor to review the business with respect to the factors that will impact the eventual sale. These factors usually are aspects of the business not obvious to the owner. An exit planning advisor will identify the risk factors that will be discovered by a buyer or that will impact a smooth transition to a family member or employees.

Finally, explore your exit options with your exit planning advisor. The internal transition options include making sure the heir-apparent family member is prepared or the requirements for an employee stock ownership plan (ESOP) are met. If the management team is interested in buying control, your exit planning advisor can help guide the process.

The external transition options are a third-party sale or, as a last resource, a liquidation. The third-party sale will require an M&A advisor, which may be the exit planning advisor, who can easily prepare the marketing plan because of the previous work helping with the exit plan. If there are limited possibilities to sell the business to a third party, it is still important for the exit planning advisor to guide the liquidation process to maximize the value of the assets being sold. Both the real assets and the intangible assets need to be valued and marketed.

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