The Importance of a Proper Business Exit Strategy

Baby boomers own approximately 40% of the country's privately held small businesses and franchises, and as they head toward retirement over the next few years they will need proper strategies to "exit" their enterprises, whether by bequeathing them to heirs or selling them to outsiders.

Exit planning is important for a myriad of reasons, including understanding your own company's total value and profitability, planning for your business' future, and gauging the impact it will have on the new owners, not to mention current employees.

"Exit planning is the premeditated strategy that business owners engage in to exit from privately held businesses when they are ready to move on to other opportunities, retire or in the event they become incapacitated," explains Jeremiah Foster, president and founder of Resolute Commercial Services, an independent business advisory firm in Scottsdale, Arizona.

People who own businesses can exit, or leave, them in several ways, including selling, merging or giving them away; each option comes with its own set of costs and benefits. "Properly executed, an exit plan helps to maximize the value of the business, minimize tax burdens and fulfill the owner's personal and business goals," Foster says.

Exit planning is particularly important now because the country is on the verge of an unprecedented transfer of wealth. Baby boomers have been the most prolific creators of privately held companies in the nation's history and its members are now 58 to 76 years old, says Chuck Canli, a business succession strategist and mergers and acquisitions advisor at Premier Sales, a sales, merger and acquisition firm in Phoenix.

"These businesses need to transfer and transition to a successor," he says. "The challenge is after the baby boomers, the next two generations combined are smaller than the baby boomers."

So, what does all this mean? "There are fewer prospects to successfully transfer and transition a business," Canli explains.

Foster concurs. "Exit planning gives you more control over what happens to your business and employees, while maximizing your net gain," he says.

David McCarville, a director at Fennemore Craig, P.C., a national business-law firm, says the success or failure of exit plans usually depends on owners' understanding of the real market value of their businesses, accurate accounting and tax records and their contractual legal rights and obligations from any sale of their business.

"Understanding the market value of your business will require a fair amount of planning since you will need an objective view of your business's market value," he says. "This should include hiring a valuation expert who is familiar with your business and can identify for you the specific factors that will make your business more or less valuable to prospective buyers."

You will need to back up your valuation with professional-quality accounting records. "Taking time to review and organize your accounting records will allow prospective buyers to complete their due diligence review faster and will save you time and money in the long run," he adds.

Sellers must get everything in writing, to forestall any misunderstanding later, McCarville adds. "Ultimately an exit plan will require a contract to define your rights and obligations in any sale of your business," he explains. "Therefore, understanding what options are available to you in terms of negotiation of both your rights and obligations under any sales contract are imperative."

Canli says the most common exit plans follow one of these paths:

• The owner remains at the company as chair of the board and delegates day-to-day responsibility for running the business to the current management team.

• The owner severs all ties to the company by transferring ownership and management responsibilities to company insiders, such as key employees, managers or family members.

• The owner leaves the company after selling it to a capable unrelated third party, which then installs its own management team.

Other scenarios exist, of course, including merging with a similar business or taking the business public by selling stock in an initial public offering, or IPO, Foster says.

To find out which option is best for you, Foster recommends asking yourself these questions:

• Do I want to remain involved in the business in some capacity after I retire or sell out? "If the answer is yes, passing your business to a family member or negotiating an employee buyout are the options most likely to allow you to remain an advisor in some capacity," Foster says.

• What are my financial goals? "A merger; selling your company to another business, partner or investor; or an IPO are the options likely to provide the highest return for your business," he adds.

• What do I want to happen to my employees and/or clients after I leave? "Passing the business to a family member, negotiating an employee buyout or selling to a partner or investor are the options likely to have the least impact on employees," he says.

• How much debt does my business have? "If the company is deep in debt, a liquidation, ABC (assignment for the benefit of creditors, a less-formal liquidation) or bankruptcy may make the most sense for your circumstances," he explains.

As with many business strategies, it is best to plan an exit strategy well before you need to use it.

"Good planning requires resources," McCarville says. "The sooner you begin exit planning, the more likely you are to save time and money in the process."

Financial experts recommend that small business owners hire an exit-planning professional and set aside time to work with them.

Trust is the key element to look for when selecting a professional to help you prepare a plan, Canli says.

To build trust, he recommends that you ask potential advisors to share some of their success stories, discuss some of their failures and talk about whether you should expect a return on the fees you will pay.

"Past experience and good communication skills should be at the top of your list when evaluating exit-planning professionals," whether they are lawyers, valuation experts or accountants, McCarville adds. "Communication is hard and a miscommunication in your exit planning can lead to critical mistakes, wasted time and lost value."

In general, people with exit-planning skills concur that the best time for owners to start working on a business exit strategy is now.

Canli says many business owners refrain from having a frank conversation about exit planning, perhaps because it reminds them of their mortality or suggests that they are no longer needed at the business. This is a mistake.

"This conversation is critical not just for the owner or founder," he says, "but really for the employees and families the business supports."

Michelle Talsma Everson is a writer and editor from Phoenix, Arizona. She has written for a variety of media outlets and believes in the power of storytelling to shine a light on important topics that make an impact in people's lives. You can see her work at mteverson.com. Read More