A Thoughtful Exit to a Brighter Future

Written by Ray V. Padrón, CPA, CFP®, CIMA® on January 1, 2016

Business owners are busy people. They create the economic engines upon which most of this country’s success has been built. They create value for their customers, jobs for their employees, and opportunity for everyone they do business with. This takes time, focus, and money. When we advise business owners at Brightworth, we focus on developing and integrating financial, tax, and investment strategies for clients and their businesses so they can spend more time running their businesses, living their lives and loving the journey. Never is that relationship and process more important than when a client realizes that it’s time to exit the business. The issues are complex and go well beyond the maximization of economic value.

First, it is a mistake to assume that the transition process can be accomplished in a short period of time. While possible to sell a business in a few months, the quick sale likely cuts short the process of addressing critical financial and personal issues in a thoughtful way. This can result in decreased overall value for you, your family, and your employees. From start to finish, a solid transition strategy can take a number of years to plan and execute before you arrive at the attorney’s office to sign a deal with the “best possible buyer.” The exit planning process needs to be thoughtful, strategic, and executed across all elements with excellence, leaving no stone or issue unturned.

Based on years of experience helping business owners with this process, each transiti on will be unique and based on the needs and the specifi c issues of each owner(s). However the elements tend to be very similar:

I. Initial Identification of Your Objectives
II. Develop a Preliminary Wealth and Estate Plan
III. Build Your Advisory Team
IV. Maximize and Protect Business Value
V. The Selling Process
VI. Transition

Initial Identification of Your Objectives: This is the single most important step in the process and the one that tends to get the least attention. The issues that surround a business owner’s exit and transition are complex and built up over years. They involve financial issues, relati onal issues, and personal self worth. Maximizing the value in a business transition is unique to the individual. Is it money in the bank after taxes? Is it leaving a great management team behind? Heirs in charge? Is it making sure the business will not fail after you leave? What about the expectations of the owners’ family, many of whom have also sacrificed over the years? Consider a short sabbatical (couples, if married) to get away and write your thoughts down including issues that you think may be lingering in the background. Then break them down into primary and secondary goals and issues based on the impact of not achieving them.

Develop a Preliminary Wealth and Estate Plan: Make sure that you will be able to accomplish most if not all of your goals from an economic standpoint. Understand the amount of wealth that will be necessary to support the lifestyle that the cash flow from the business has been supporting over the years. This process will be instrumental as you walk towards a deal. It includes extensive data collection on the part of your Brightworth Team, preliminary business valuations, long range cash and investment strategy as well as scenario analysis to determine the impact of various sales prices and whether it is wise to sell all or keep some assets to lease, such as real estate. This critical step will allow the business owner and their spouse to bett er prioritize and focus their existing goals as well as uncover new issues and opportunities to explore further.

Build Your Advisory Team: Your Advisory Team is there to support your agenda rather than control it. It will eventually be made up of several important professionals each bringing unique experti se to the process. Your Wealth Advisor will not only provide context for the development of your sales strategy, they will also coordinate with your other advisors, including your CPA, business attorney, valuation experts and business consultants. Finally, an investment banker or selling agent may join the team if an outside sale is preferable.

Maximize and Protect Business Value: The next step is to set a preliminary valuati on of your business. Before actually putti ng the business up for sale or discussing a transiti on with family members or employees, the business owner should take specific strategic and operational steps in order to maximize their business value, not only to enhance economic benefit but also to increase the chances of business survival. This may require the retention of an industry expert or consultant to assist in defining and making operational changes. Also, a comprehensive evaluation of the succession and continuity planning should be included in this stage. In many cases, adjusting how compensation is paid or profits are distributed is recommended to more accurately reflect the true economics of the business. The tax strategies that previously helped maximize owner’s cash flow should be secondary.

The Selling Process: Communication is key to the sales process. It is critical to communicate with the stakeholders in stages, and at the appropriate time, regarding the owner’s transition and what it means for them. This process may take weeks, months or even years and will depend on the nature of the exit strategy.

The exit strategy may include one or several of the following:

1. Sale to Outside Owner
2. Private Equity Recapitalization
3. Employee Stock Ownership Plan
4. Management Buyout (including family members)
5. Family Wealth Transfer and Gifting Driven Sale. This is similar to a Management Buyout but with diff erent motivations and economics.

Transition: Your objectives are defined and modified as your personal wealth planning evolves, your Advisory Team is in place, and the business is positi oned toward maximum value and a successful transition. Once you have selected your exit strategy and have initiated your sales process, your transition has already started. While you may not have yet signed the countless legal documents, your priorities have already started to change and will continue to over time.

Conclusion: As a group, business owners tend to see their “postsale” life optimistically, with an exciting new active stage characterized by continued personal growth, personal reinvention and new beginnings. At the same time, they have a strong connection to their business which has played a prominent role in their personal identification. For these reasons, the exit planning process needs to be thoughtful, strategic and executed across all elements with excellence, leaving no stone or issue unturned. While your past was essential to becoming who you are today, it is your future that you are looking forward to; a future that includes new decisions, objectives, and possibilities.