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An Entry Into Exit Planning

William J. Lynott November 2011 issue of Skin Inc. magazine

Although there is no way for you to know when you will have to part company with your business, you can be certain that it will happen. That leaves only the question of how you will take your leave.

John H. Brown of A&W Tax Service Associates in Brooklyn, New York, a professional exit planner, says he knows of only eight ways to leave a business.

  1. Transfer the business to a family member.
  2. Sell it to one or more key employees.
  3. Sell to key employees using an employee stock ownership plan (ESOP).
  4. Sell it to one or more co-owners.
  5. Sell it to an outside third party.
  6. Engage in an initial public offering (IPO).
  7. Retain ownership but become a passive owner.
  8. Liquidate.

Chances are that one of these paths is best for you, but which one? Whether your retirement is just around the corner or years away, you owe it to yourself to consider these questions right now. “The No. 1mistake in exit planning is waiting too late to begin,” says exit planning professional Greg Austin, CPA, of Business Enterprise Institute, Inc. in Golden, Colorado. Waiting until it’s too late to do a thorough job often forces owners to sell their businesses at a disadvantage.

Your exit plan will affect your business plan

Let’s say that your retirement plan includes the hope that you will be able sell your spa to an outsider or competitor for a tidy sum. In that case, do everything possible to build the market value of the business. That may include such tactics as making capital investments in facilities or equipment, and creating marketing plans designed to ensure steady growth.

And don’t forget your own financial needs. If you expect to add to your retirement fund with a hefty chunk of money from the sale of your business, that could be a problem if you decide to sell to a family member, or even a partner or employee. Where will that money come from? If the buyer can’t come up with it, an expensive loan could prove to be a roadblock to the sale.

Will you disappear or stick around?

Perhaps you’ve had your fill of the pressures, stresses and headaches that go along with carrying the entire load yourself, but can’t stand the idea of retiring completely. In that case, you may find yourself looking for a buyer willing and anxious to take advantage of your experience and knowledge. This could mean a sales agreement that includes your continued participation as a paid consultant or part-time employee.

What happens if you die?

“Although none of us likes to contemplate what would happen if we were to become disabled or die suddenly, a good exit plan will have those bases covered,” says Austin. “This could include insurance, stay-bonus plans for employees, buy/sell agreements with co-owners or friendly competitors, or other contingency planning tools.”

Also, your exit plan should include enough insurance to allow for continuation of the business, at least until your heirs or partners are able to sort everything out well enough to allow them to stay in business or arrange for a profitable sale.

Don’t etch your plan in stone

There is one characteristic common to every well thought-out business plan: flexibility. No matter how certain you are now of just how you want your exit from the business to play out, there’s a good chance that you will change some part of your thinking before that time arrives. You must be ready and willing to adapt your plan to changing circumstances.

Will you need professional help?

“Professional exit planners recognize the importance of allowing the business owner to determine the how and when of exiting,” says Austin. “A skillfully drawn plan will consider not only the financial and tax ramifications for the former owner, but also for the new owners. A good exit plan will also take the owner’s family and personal situation into account.”

Whether you need a professional exit planner to help you put your plan together is a decision that only you can make. However, professional planners agree that the most important step you can take in exit planning is to get started early. According to Austin, “The day you start your business is not too early to begin planning for your exit.”

William J. Lynott is a veteran freelance writer who specializes in business management, as well as personal and business finance. His work appears regularly in leading trade publications and newspapers, in addition to consumer magazines such as Reader’s Digest, AARP Bulletin and Family Circle.