Your Last Five Years: It is Crucial to Make the Right Turns When Determining Your Exit Strategy

By: Patrick Ungashick

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This article is the second installment of a seven-part series on what business owners need to do once they reach the Last Five Years before exit.

yl5y.pngIn the first article of our series, Your Last Five Years, we examined why five years is a tipping point, at which time owners must start planning their exit. Click here to review that article.

Once business owners reach the point where they believe they would like to exit within the next five years, then five questions now become critical to answer. These five questions will largely define your exit goals, and identify the work required to help you achieve them. There’s no way to sugar-coat this—answering these five questions must happen as you enter your last five years. Going forward without clearly defined goals is like driving in a car without knowing one’s destination—you have no way of knowing if the next left or right turn will end up taking you anywhere good. 

We will examine each of these five questions in detail over the new few weeks as part of this article series. The five critical questions are:

Part 1 - What is My Likely Exit Strategy?
Part 2 - How Much Do I Need to Net From My Exit?
Part 3 - What Do I Want My Legacy to Be?
Part 4 - What Do I Want To Do in Life After Exit?
Part 5 - How Exitable is My Company? 



Question 1: What is My Likely Exit Strategy?

Once you enter Your Last Five Years, it’s imperative to identify your likely exit strategy from the four choices available. Why? Because different exit strategies require different exit tactics to implement that strategy successfully. Consider this one example dealing with your company’s balance sheet. If your exit strategy is to pass your business down to family members (one of the four possible strategies), ideally, we want the balance sheet to show little owner’s equity and a weak asset base. This direction can help justify a low company valuation, which is good for taxes.

In contrast, if your exit strategy is to sell your company to an outside buyer (another of the four possible exit strategies), then ideally you want a strong balance sheet, to help justify an aggressive business sale price. In both situations, we typically want to work with at least three years’ historical balance sheets. So right away you can see that when entering Your Last Five Years, we must ascertain your likely exit strategy to begin tactic implementations that will strengthen, or weaken, the balance sheet. 

The balance sheet is just one example comparing two different exit strategies. There are only four possible exit strategies:

  • Pass the Business to Family
  • Sell to an Outside Buyer
  • Sell to an Inside Buyer
  • Planned Liquidation

(Note: Unplanned liquidation is bad. Planned liquidation does occur. However, planned liquidation is the least commonly pursued strategy.) Some owners point out a fifth exit strategy—keeping the company until death. We suggest that death is not a strategy, but a triggering event; because one of these four exit strategies will trigger when you die. The need to know which exit strategy is yours, extends beyond just balance sheets.

The chart below gives seven examples of different tactics that need to be considered and implemented, depending on which exit strategy you pursue:

Possible Exit Stategies 1) Sell to Outside Buyer 2) Sell to Inside Buyer 3) Pass to Family
Normalize Earnings Required Required Not Required 
Audit Financial Statements  Required  Usually Not Required Not Required 
Develop Successor CEO  Not Required   Required Required 
Devise Ownership Transfer Plan  Not Required Required  Required
Address Transfer Taxes  Not Required  Not Required   Required
Evaluate ESOPs  Not Required Required  Not Required
Address Personal Guarantees  Not Required  Required   Required

At this point, many owners are either unsure of their likely exit strategy, or think they know, but want to test their answers. We have organized on our website several resources to guide you through this question. Visit our How Do I Determine My Exit Strategy page to learn more.

One last point on this important question. Many owners assume an exit strategy, without testing how viable that strategy may be. For example, if you want to pass your business to your children, you must be sure the children are ready and willing to receive your business. If not, your exit strategy may not be viable. In another example, if you want to sell your business to an inside buyer, typically one or more employees, then your buyer/employees must be able to afford the company. If not, that exit strategy may not be viable. So, once you think you know your likely exit strategy, you still must review it carefully to be sure that the strategy you select has the potential to be successful. To get assistance with this question, consider speaking with one of our Consultants to review your situation.

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In the next article in this series, we will examine the second question you must answer when entering Your Last Five Years: “How Much Do I Need to Net From My Exit?”

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