As a reminder, these seven steps are based on BEI’s Seven Step Exit Planning Process
Last week, we introduced a new blog series on exit planning. There are many things to consider when you’re getting ready to exit. Today’s topic? Identifying owner objectives and goals.
In order to successfully begin exit planning, you need to identify goals and objectives to guide you through the stages of exit planning. These goals act as a roadmap and, let’s face it, trying to navigate without a roadmap is a difficult task that can take you in circles and get you lost.
“When a man does not know which harbor he is heading for, no wind is the right wind” – Seneca
This quote, although a classic, still holds true today, especially in the world of exit planning. In the context of exiting a business, no goal means no style. There will be no smooth transition or easy transaction; the process will be bumpy and difficult. In 2015, Securian Financial Group conducted a study which found that 72% of small to midsized business owners don’t have an exit plan, and aren’t taking action toward getting one. If goals are so important in exit planning, why are so many people not setting them?
The main reason, according to Business Enterprise Institute, is because many owners find it emotionally exhausting. From the idea of separating themselves from an entity they have created, nurtured and watched succeed, to the time and energy needed to create a successful exit strategy, many owners just simply feel they cannot handle the pressure. However, by setting goals and objectives, some of this stress can be alleviated, as these goals are the guidelines for the strategy.
John Brown of the Business Enterprise Institute notes there are five central elements needed before a comprehensive exit plan can be created. These elements include:
- setting a departure date
- conducting a financial needs analysis,
- choosing a successor
- determining the preliminary valuation of the company
- estimating the company’s future cash flows
Although all five elements are highly important, the first three embody the key universal objectives in developing a successful exit strategy.
Setting a Departure Date
The first step in creating an exit plan is setting a date for departure, as this will be the basis for your plan. You might be wondering how in the world it’s possible to simply pick a date. Many people plan around a significant life event, such as a child’s graduation or reaching retirement age. Other owners may just throw a date out there that sounds appealing. However you decide to choose your departure date, it is important to note that nothing is set in stone, and a rough estimate is better than nothing at all.
Financial Needs Analysis
Conducting the financial needs analysis will, in the most basic sense, tell you how much money you need from the sale of your business in order to live comfortably. To conduct this analysis effectively, a business owner must look at his or her current lifestyle choices, and determine how they expect this lifestyle to look in the future and how much it will cost. Then, many factors, such as inflation rate, life expectancy, after tax income rate and income variations, must be considered. Once all of these items have been factored together, the owner can come up with the bottom line amount needed from the sale of the business.
Choosing a Successor
Choosing a successor may be one of the hardest steps in exit planning. In this step, the owner is faced with a choice of who will take the reins once he or she makes their exit. There are many types of successors (some of them are mentioned here) that owners must consider, but the five that are the most common on include:
- key employees
- an unrelated third party
- an ESOP
- Each of these choices have advantages and disadvantages (more on that down the road) that must be taken into account when making the choice. It is important to make sure you don’t let emotions get in the way; it is often best to follow your gut feeling – if it’s wrong, this can possibly be tweaked. It is better to have made your choice, and maybe even included a backup option, than have nothing at all.
This first step in exit planning helps owners clarify and prioritize objectives, facilitate progress, control the exit planning process and focus energy on the reason they got into business in the first place.
Next up: business valuation and future cash flows. Stay tuned!