Planning for the future is important for everyone, but it is even more important for the owner of a business. For many business owners, the value of their business constitutes the majority of their total net worth. And a lot of times, an exit from a business is involuntary. We often think of the four Ds: death, disability, divorce, and disagreement. As you can imagine, if any of those happens, you may be facing an involuntary exit.

In light of that, it is surprising that an estimated 60% of owners do not understand all of their exit options. And on top of that, up to 75% of owners regret the decision to sell their business a year later. That’s what makes exit planning so important to get right.

Types of Exits

There are two broad types of exits.

Internal options include intergenerational transfer, (such as gifting or selling it to the next generation such as your children), selling the business to your key employees or the management team, or an ESOP, an employee stock ownership plan.

External transitions include selling to a strategic buyer such as a competitor or selling to a financial institution such as a private equity firm.

Regardless of which exit option the business owner ultimately chooses, it is important that the exit plan addresses the three legs of the owner’s stool. That is, their personal situation, their personal financial situation in terms of their ability to retire, and the business valuation. Next, we’ll take a look at each of those legs of the stool and what the biggest challenge is of each one.

Personal Leg: What’s next?

The personal leg is often the most difficult leg because, for many business owners, so much of their life and their identity has been wrapped up in that business. And that is why so many of them can regret the decision to exit the business a year later. So, it is really important to get this right. What are your family considerations? Thinking of your spouse or your children - what are their interests in the business? Are they ready for you to retire? Are they interested in owning the business? Are they interested in running the business? Those are questions you have to answer. You also have to know, what you plan to do in retirement. You can only play so much golf or sit on the beach so many days. You need to have purpose in that next stage of life.

Financial Leg: Unknown Wealth Gap

The next challenge is looking at the financial leg of the stool. What are the owner’s finances going to be like when they are in retirement? When you retire, you move from living off of the earned income that you make each year from the business to living off the assets that you have. It is really important to understand what you need to be ready to retire and maintain the quality of life that you want. This is where you need to have a financial advisor who is an expert in this area and can advise you on what you need to retire for your specific situation.

Once you understand what your ultimate goal is, where you need to be in terms of assets to be able to retire, then you need to look at where you are today in terms of current liquid assets without the business. And then that wealth gap is the delta. It’s the difference between the assets that you need to have and what you have today outside of the business. That is the value that you need to get from whatever form of exit that you choose from the business. Those are the assets you need to complete your retirement plan.

Business Leg: Maximizing Value by Increasing Attractiveness And Readiness

Finally, the business leg. We need to make sure that we are maximizing the value of the business and getting it ready to be transferable by looking at its attractiveness and readiness. You would not sell your home by just putting it on the market. You would make sure that it is ready to sell. Well, it is the same with the business except it is much more complex when you go to sell a business or transfer it to the next generation. So, we want to look at how can we improve the financial performance of the business often measured by EBITDA, and we want to look at how can we increase the value that somebody would pay for it by increasing the multiple. And that is where we get into making the business more attractive and more ready to sell by reducing things like customer concentration and owner dependence. One of the ways that we do that is by implementing the Value Acceleration Methodology. This is a methodology where we look at all three legs of the stool and working together with a team of advisors, we continue to work on making sure that all three legs of the stool, including the business, are ready for the next phase of the exit plan.

Solution: Owner-focused, Team-based Approach

Considering the three legs of the stool of exit planning and the challenges with each, it is really important that you assemble the right team of advisors to walk alongside the business owner to help achieve success with this plan. The three key players are in the center: your accountant, your personal financial advisor, and a consultant who can bring the team together and help you stay focused on running the business, allowing you to make the key decisions at every step of the way during the exit planning process. At the appropriate time, other experts will be brought into this, such as attorneys, to help with various parts of the exit planning process.

When to Start

We are often asked, “When should I start the exit planning process?” And the short answer is yesterday. You really can’t start this process too soon. I like the way Stephen Covey says it, “Begin with the end in mind.” It is important to understand where you want to end up ultimately. And then with that in mind, we can build a plan to get there.

Exiting a business is one of the most important personal and financial decisions you will make in your entire life. If you would like help with the exit planning process, please contact us, we would love to talk with you.

Gray Wirth has served more than 30 years as a leader in corporate, nonprofit, small business, and military contexts. He has successfully led organizations ranging from 100 to 3,100 employees. Gray has lived and worked in five different countries, been a CEO, and accumulated more than 25 years of experience on nonprofit and for-profit boards. He brings experience in executive coaching, strategic planning, and advising boards of directors and business owners. As a Certified Exit Planning Advisor (CEPA®), Gray helps business owners plan in advance for future transitions to ensure that their business, personal, and financial objectives will be achieved. Gray is a U.S. Army veteran and holds a B.S. from Cornell University, an M.B.A. from Harvard University, and an M.A.R. from Westminster Theological Seminary.