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Exit Planning Helps
Maximize the Sale Price of a Business
Edward L. Fixen, President
BusinessQuest
It’s very interesting that most business owners do not hesitate to buy and invest in insurance to protect their personal and business assets, yet don’t make the nominal investment in an exit plan that protects a business owner’s greatest asset, the value of their business when it comes time to sell. Not only does an exit plan serve to protect the value of your business, it should provide a significant increase in the net amount of money you realize from the sale of your business.
I do understand that planning and preparing for the successful sale of a business is made very difficult by the day-to-day demands of running a business. Perhaps that is why it has been reported that less than 28% of privately held businesses are estimated to have a business exit plan, despite the reality that exiting your business is a certain outcome for every business owner. Fortunately, the time and cost associated with a well prepared and executed exit plan can be both manageable and affordable. As tough as the current economy has been on most businesses, now is the perfect time to take steps to prepare your business for sale so that you will be able to maximize the value of your business when the economy does begin recovering.
What Is An Exit Plan? An exit plan is really the final chapter of a well written business plan. A business plan provides a road map for achieving various operating and financial goals during the life of the business. An exit plan identifies in great detail, the last mile of the business plan road map regarding the steps an owner of a business should take to achieve personal financial goals when it comes time to exit and sale the business. An exit plan addresses business, personal, financial, legal and tax related issues involved in the sale of a business. A well executed exit plan will enable an owner to:
· Control how & when to exit the business
· Have contingencies for illness, burnout, divorce and even death
· Allow continuity of the business
· Minimize, defer or eliminate capital gains taxes
· Achieve financial & personal goals
· Maximize company value in good times and bad
How To Get Started. The first step of an exit plan should be to develop a benchmark fair market valuation and operational/organizational assessment of your business today. This initial valuation and business assessment will provide the basis of your company’s market value today and provide very specific and tangible recommended steps from a financial, operational, management and organizational perspective to improve the value of your company. This information will also enable a business owner to determine if current business conditions will meet personal/family financial needs after the sale of the business or if improvements identified in the analysis should be pursued. Firms with professional business appraisal, acquisition and consulting experience are an excellent source for this initial step and can serve as the “Exit Plan Coordinator” for the continued development of your exit plan. The benefit of this first step is that not only are you identifying ways to improve the value of your business and developing the foundation for an exit plan, you are also getting a professional business appraisal which will be very beneficial when it comes time to sell.
Depending on the size of your business and the complexities of your business and personal investments, the next steps might involve a multi-disciplinary team of one or more professionals consisting of financial advisor, insurance professional, CPA, estate planner/attorney and business attorney to develop a comprehensive exit plan. Discussion of these topics is beyond the scope of this article but will be discussed in future articles.
What Is The Value Of An Exit Plan?. Given enough time to work, an exit plan should help reduce capital gains taxes, increase the sale price and as a result significantly increase the net proceeds that you have to invest after the sale. Case studies cited by the Exit Planning Institute have shown a return of 100% plus on the investment required to develop an exit plan. Depending on the value of the business, a good exit plan can translate into savings up to several hundred thousand dollars or more after exit plan costs.
When Should You Get Started? It is only natural not to think about selling your business until you are ready to retire or move on to a new challenge in life. However, since it takes 9 to 12 months on average to complete the sale of a business once you have completed the pre-sale business valuation/preparation and you will likely be expected to have a continued involvement in the business for some time period after the sale, you should begin the exit planning and preparation process three to five years but no less than two years before you actually want to exit the business.
Whether you are considering selling now, five years or ten years and regardless of when the economy turns around, now is the perfect time to start planning your exit strategy.
Author: Mr. Fixen is a Certified Business Broker, member of Institute of Business Appraisers and the President of BusinessQuest, a business appraisal, exit planning and brokerage firm serving Southern California. Mr. Fixen can be contacted at Ed@BusinessQuestBrokers.com.
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