Exit Planning: Start Early to Maximize Your Company’s Worth

If you’re like most middle-market business owners, your wealth is largely tied up in the company. Exiting the business is your chance to unlock and harvest that wealth.

Unfortunately, too many business transitions are unplanned, whether due to illness, divorce, or other unforeseen circumstances. Additionally, investors are as savvy as ever, and you may find yourself with an offer sitting on your desk before you had time to plan for a proper exit.

According to research by the Exit Planning Institute, half of business transitions are involuntary. Even more sobering, only 20% to 30% of owners who take their companies to market successfully sell, and most of those who do close a transaction wind up with regrets. Only 5% of business owners report one year later that they are happy with the net proceeds from the sale of their business.

How do you increase the chances of exiting the business on your own terms and reaping a healthy return on your years of investment in the business? The answer is in planning and preparation to navigate risks and be ready to sell the business at any time.

How Long Does It Take to Plan a Successful Exit?

Exit planning is the process of aligning your personal, financial, and business goals so that you can harvest the maximum value from your business.

The road to your ideal exit ramp winds through several key phases, outlined below.

Exit Curious

Even if a sale or transition is years away, the thought of your eventual exit is likely on your radar. You might already be in the process of consulting with your trusted advisors and peers who have gone through an exit, learning about the successes and failures of those who’ve “been there, done that.” At the same time, be sure to explore your own motivations and intentions as you consider a future outside of the business.

Discover

As you start to seriously plan for your exit, you’ll need to discover the answers to two key questions: How much money will I need to live the life I want after my exit? What is my company worth if I were to sell it today? If there is a significant gap between those two numbers, then it’s time to turn your attention to improving the value of the business. Building the value of the business starts with a clear and accurate view of its financial health. Businesses in the lower middle market tend to prioritize tax minimization, which may be reasonable from a short-term operational perspective but not when you’re trying to maximize your company’s value through the deal process.

Decide & Protect

Once you’re clear about your personal and financial objectives, you’ll need to decide how you want to exit the business, and just as importantly, how to protect what you’ve built. Part of this process is assessing the potential exit strategies available, such as a sale to a larger corporation, to private equity, or to other financially motivated buyers, or an internal transition to family or management team members. Even if you think you’re going to transition the company to a key employee or family member, keep in mind that circumstances change. By preparing your business as if for an external sale, you will put yourself in a strong position regardless of the actual outcome.

A well-thought-out succession plan is another crucial component of an owner’s exit plan. Many business owners struggle with the idea of replacing themselves before they’re ready to retire. But by putting off succession planning, you are essentially reducing the value of the business. Think of it this way: If you took a month-long vacation, would your company fall to pieces? If the answer is yes, then you can bet an outside buyer will take a dim view of the company’s value.

Build & Prepare

When economic conditions are uncertain, buyers tend to dig deeper during due diligence and negotiate harder. Sell-side due diligence is like taking your car to the mechanic to make sure it’s road-ready before a trip. Consider engaging sell-side transaction advisors to perform a quality of earnings analysis to surface any risks and financial weaknesses that could make a buyer think twice. By finding these issues early, you can spend the time needed to address them as you work toward a transaction.

Selling the Business

Once you have the pre-transaction structures and processes in place, you’ll work with your mergers and acquisitions (M&A) advisor or business broker to put the transaction into motion — whether by taking the business to market or executing an internal transfer of ownership. Strong execution of all the steps that lead up to the transaction will make the difference between a disappointing deal and a successful one.

Transition Period

It’s never too early to start planning for your life after the business. Whether or not you plan to retain a continued role in the business, it’s important to prepare yourself for what life will be like once you’re no longer in charge. Consider whether you will want to spend your time and energy on personal passions or possibly invest some of your new capital in new business ventures.

Build Your Exit Planning Team

Each phase of the exit planning timeline requires specialized expertise. Buyers of mid-market companies typically have dozens to hundreds of transactions under their belts, and they have sophisticated, professional M&A teams that can tip the scales in their favor. To protect your own interests and increase your chances of meeting your personal financial goals, you will want your own team of advisors with deep experience in exit planning and executing middle-market transactions. Your personal roster should include:

• Wealth management: A wealth management team takes a big-picture view of your overall financial situation. They can work with you to develop a clear picture of how much capital you will need to fund the kind of post-sale future you envision.
• Transaction advisory services (TAS): A TAS team will perform thorough sell-side financial due diligence to ensure the business is financially prepared for a transaction.
• Tax: Your transaction tax specialist will advise on tax strategies and the optimal deal structure to maximize after-tax proceeds.
• Estate and trust planning: Your estate and trust planning team will help you put in place structures to achieve tax-efficient intergenerational wealth transfer while laying the groundwork for your long-term legacy.
• M&A investment banking: Just as you would retain a real estate broker before buying or selling a house, retaining a business broker is a smart investment when selling a business.
• M&A attorney: The sale of a company is one of the most legally complex transactions an owner will ever go through. A specialized M&A attorney is essential and should be involved early in the process—ideally as soon as you begin serious conversations with potential buyers.

In addition to having experience with middle-market transactions, your exit planning team should be comfortable working hand-in-hand with one another and with you. With your advisory team taking care of the crucial details, you can stay focused on running your business as you move toward your exit.

Are You Ready to Find the Exit Ramp?

When it comes to planning for a smooth and profitable exit from your business, there is no such thing as “too early.” From the inception of your business until you’re ready to turn over the keys, it’s wise to run your business like you’re ready to sell it at any time. By investing the time and resources to plan for your transition on your terms, you free yourself up to embark on your next chapter with confidence and financial security. Contact your CRI advisor today to start planning for the rest of your life.