According to our research, nine out of ten owners stated they do not have a current, written exit plan. Most owners need guidance on what a sound plan looks like. Naturally, most owners have no idea what is required to be ready for exit, because they have never exited before. The marketplace offers little help.
A thorough and sound exit plan needs to address a variety of business, personal, financial, accounting, legal and other issues. If a plan fails to consider any one of these areas, it could not only miss an issue but possibly cause more harm than good.
The attached short, assessment overviews the 25 most important areas that an exit plan needs to address. Use this tool to quickly audit your existing exit plan, or to assist you in getting started.
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Ask any owners of a successful business, “When do you want to exit?” and chances are they will say something like, “In about ten years.” Ask them the same question several years later and the answer usually doesn’t change. We call this bad habit the Rolling Ten Years Phenomenon. Our research shows that among owners over the age of 50 and older, more than seven out of ten stated their ideal time frame was within ten years. Almost two out of three owners ages 40-49 also said ten years and nearly half of the owners ages 30-39. The “ten year answer” keeps rolling forward from the owner’s thirties all the way to their sixties.
Pass to Family
Sell to Outside Third Parties
Sell to Inside Key Employees
Either during your lifetime or at death, your business will be given away, sold, or liquidated. These three outcomes are not exit strategies. The word “strategy” implies a desirable result. Death is not a strategy! There are, in fact, only four possible exit strategies. Identifying your strategy as early as possible creates a clear path to achieve a successful exit.
Selling your business to an outside buyer and selling it to one or more key employees are different strategies. Conventional wisdom often lumps these two options together as simply “selling the business.” An outside party sale is usually a completely different process from selling it to one or more employees. To successfully implement these four strategies may require four totally different sets of tactics.
Achieving financial freedom after you exit your business does not happen without a solid plan. That’s why NAVIX developed the Exit Magic Number™ calculation. It determines the value you need from the business between now and your target exit date to achieve financial freedom. Note that the Exit Magic Number focuses on how much you need from the business, not what your business is worth. This is a different approach from most conventional approaches, which emphasizes getting “maximum value” for the business. Getting maximum value is good and desirable but may not be the most important issue.
What if you succeed in getting “maximum value” but find you are unable to afford financial freedom? Is this a successful exit?
There are two reasons why the Exit Magic Number calculation is arguably the most important number in exit planning for closely held business owners. One reason is “defensive” and the other is “offensive”.
On the defensive side, the issue is simple but critical—if the owner exits for a net amount short of his or her Exit Magic Number, he or she will fail to achieve personal financial freedom in the manner he or she aspires. The owner who falls short must either reduce his or her post-exit lifestyle, take on higher post-exit investment risks than he or she is comfortable with, go back to work, or some combination of the three. Few owners would happily choose this outcome.
Knowing one’s Exit Magic Number allows the owner to take control of the process by making decisions today and at exit that defend against coming up short. For example, identifying the number well before exit helps the owner forecast how big the business must grow to in order to not come up short, and make strategic decisions that drive the business toward the owner’s exit success. In another example, an owner seeking to sell the business can use his or her Exit Magic Number calculation to negotiate the deal terms with an eye towards receiving sufficient cash at closing to reach personal financial freedom. The selling owner who walks away from the closing table with net cash sufficient to achieve personal financial freedom is assured that any additional dollars in the transaction not received at closing and therefore at risk, such as deferred payments, earn outs, seller financing etc., will not compromise his or her financial security.
Playing “offense,” owners who know their Exit Magic Number calculation can take advantage of tactics at business sale that defer and reduce income taxes, estate and gift taxes. Having an accurate estimate of the Exit Magic Number allows owners to consider estate tax sheltering strategies without undermining their future financial freedom.
The lack of adequate preparation is not difficult to diagnose, but it is easy to understand. With daily business demands it’s easy to ignore an issue that you believe is five, ten or more years down the road. As a client once said, “When I’m so busy keeping it going, I can’t be thinking about the finish.”
Most closely held businesses are illiquid, difficult to value and vulnerable to an immense range of risks—only some of which owners can influence or control. Exiting and freeing the captive wealth can be complex and costly, especially in terms of taxes.
Growing a business is not enough to create a happy exit. If that were all it took, then every business above a certain size would quickly sell for top dollar. Exiting successfully requires more than growing your business. It requires a clear and conscious plan getting the business ready by creating transferable value, and getting the owners ready at the same time.
NAVIX successfully helps business owners create happy exits because we understand what buyers are looking for. We look beyond gross sales and profits.
Based on the limited amount of information in the table, put yourself in the shoes of a buyer and guess which business you would rather buy?
What other information is necessary to make an informed decision?
|Company A||Company B|
|$20 million gross sales||$10 million gross sales|
|$2.0 million pre-tax profits||$0.9 million pre-tax profits|
|Revenues up 5% last year||Revenues flat last year|
|Owners work 50 hours/week||Owners work 50 hours/month|