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The foundation of an Exit Plan relies on extensive planning and solid implementation. At the cornerstone of a functional Exit Plan, your job as the business advisor is to guide the business owner so that the business can live on after the owner exits. 

For small-business owners, retirement planning is not as simple as saving a certain amount of money in a retirement account. A significant part of retirement planning is Exit Planning, which involves creating a strategy to transition out of the business while maximizing its value. 

So, what can you do to set your client up for success when exiting their business? First and foremost, you should help your client create a timeline for the exit process. This timeline should include both short-term and long-term goals, such as:

• When the owner plans to retire 
• How long it will take to transition out of the business 
• When the new owner will take over

Additionally, you as the advisor should help your client establish a plan for handing off the business to a chosen successor. This plan should include an:

• Overview of the business 
• Organized financial review
• Assessment of the business’s strengths and weaknesses. 

Next, you should help your client review their financial documents, such as their balance sheets, cash flows, and income statements, to ensure that they are up-to-date and accurate. With the right planning and guidance, your client can successfully transition out of their business and maximize its value.

Guiding your business-owning client throughout the Exit Planning Process is essential to a successful exit. Due to differing business exit strategies, many business owners fail to plan for the exit of their business, or make mistakes when planning their exit strategy. 

In this blog post, we will discuss tips to overcome the most common mistakes small-business owners make when planning their exit strategy. 

Tip 1: Proactivity is Key

Many small-business owners start planning their exit strategy when they are already close to retirement age. However, Exit Planning should start long before retirement. Business owners should invest in building a strong culture, optimizing processes, and building revenue from day one. This will not only make it easier to leave when the time comes, but it will also make the business more valuable to potential buyers.

It is important for business owners to assess how well a potential hire’s values and work ethic align with their own during the recruitment process. Generous training, pay, and benefits can also show hard-working employees appreciation and create a healthy culture. This is especially true for key employees as they are an integral part of the value drivers for the business.

Streamlining operational aspects of the business can help increase the value of the business to potential buyers. Business owners should also work on expanding their product or service offerings or increasing the markets in which they do business to create a diversified revenue stream. In a previous blog post, we dive into Proactive Business Advising.

Tip 2: Identify a Business Successor

Selling a company is not the only way to exit the business and retire. Business owners should consider having a trusted business partner or family member take over the day-to-day operations of the business. This can help create a family legacy and ease the transition for the business owner, which can satisfy the non-financial goals of many business owners. 

However, it is important to make this plan clear well before retirement to allow time to train and coordinate with the successor. Check out our blog post for helpful tips on Selecting the Best-Suited Successor to the Business Owner!

Tip 3: Become Indispensable

Building a business model around oneself as the central component can delay retirement and make it harder to transition the business to someone else. Business owners should empower others to take their place as often as possible. This could include being more of a mentor than a boss, memorializing policies and procedures, and delegating tasks appropriately. If the majority of the business value is with the owner directly through knowledge and client relationships, the business itself won’t be valuable to another owner.

The Bottom Line

In conclusion, it is never too early for your clients to plan for a business exit. Developing a plan to transition out of the business doesn’t have to be a stressful process. It is important to make sure that the successor is properly trained and given time to adjust to the new role. 

Additionally, business owners should become more of a mentor to empower others to take their place and should document policies and procedures to make the transition easier. Planning for retirement may seem daunting, but it is essential for the future of the business. By avoiding these common mistakes, small-business owners can maximize the value of their business and ensure a smooth transition out of the business when the time comes.

Help your clients create  an internal transition team to help with the process. The team should include members from different areas such as finance, operations, and marketing. This team can help to identify any areas of the business that need to be addressed prior to the transition. 

Furthermore, create a timeline for the transition and create a list of goals that need to be achieved to share with the advisor team. With clarity around the goals and expectations of each member, you’ll ensure that your client’s transition out of business is as smooth and successful as possible.

Every exit path requires a solid planning and implementation foundation. At the cornerstone of a functional Exit Plan, your job as the business advisor is to help select the best-suited successor to the business owner so that the business can live on after the owner exits. 

In a Forbes article that discusses choosing a business successor, it’s noted that “The intent of succession planning is to “future-proof” the business – by developing a strategic guide that builds upon the leader’s vision with a focus on a sustainable scale and continual growth for the future.” 

However, it’s hard to guide an Exit Plan in one direction or another without taking the time to pick a target successor. Compared to the lists of possible departure dates or the variety of lifestyle needs at retirement, the list of possible successors may actually be quite short: 

• A child, children or other family member 
• A co-owner(s) 
• A key employee (or key employee group) 
• An unrelated third party 
• An ESOP (Employee Stock Ownership Plan)

For the purposes of this blog post, we are going to focus on the top three successor options – all Insider Transfers – to discuss the considerations needed to be made when choosing successors. 

How a Successor Honors Values-Based Goals 

For owners set on an insider transition, this path is usually considered due to convenience and trust. A transfer to insiders, especially family transfers, are typically a surefire way for a business to carry on a legacy if that is something that the owner is looking to do. 

The appeal of an insider transfer is frequently due to the aspiration to reach any of the following goals at the time of their business exit: 

• Keeping the business in the community 
• Maintaining existing company culture
• Ensuring the owner’s legacy and/or family tradition remains 
• Owner maintaining a desirable amount of control and flexibility while transitioning 
• Encourages employees to stay with and grow with the company 
• Business continuity may be easier to preserve

An Advisor’s Role in Choosing a Successor 

As an advisor, it is your job to explain to your clients how each insider transfer option can help reach their ownership objectives. Further, helping them identify the appropriate choice is crucial in ensuring they are able to set aside sentiment and emotions to make the smart choice and avoid common mistakes. 

Three tips for business advisors: 

1. Refer back to the financial needs analysis and the company’s preliminary valuation that will provide logical and rational facts for an emotionally charged decision.
2. Relate each successor choice to your owner’s values-based goals (like the ones listed above) to evaluate if the chosen successor will ultimately help reach those objectives and how.  
3. Remind business owners that taking the time to make certain you have made the right choice is better than proceeding down the path with the wrong successor and having to eventually change paths or delay an exit.

Questions for Advisors to Ask Business Owners 

It is one thing for a business owner to select a successor who they’d like to take over their business. However, a successful business transfer is very dependent on the willingness of the successor to put forth time, money, and energy to the transition plan, and the overall business. 

As the advisor to business owners, you must ask questions of your owner clients that will get them to think about the feasibility and reality of the successor they have in mind. Such questions might include: 

1. Is the successor capable of being an owner? 

Owners should be able to explain to you why their chosen successor(s) can run the business without them. Even the best employees do not necessarily make good owners. 

2. Does the successor desire to be an owner? 

A common mistake that owners often make is to assume their chosen successor wants to become an owner. This misstep is often made in situations where owners want to pass down their business to a child or family member. While it might be easy to assume that one day their child or family member will take over for the sake of keeping the business in the family, ultimately successors must possess the same spark that motivated the owner to start the business in the first place. 

3. Does the successor understand the risk involved in business ownership? 

Many times even if a successor is interested and/or capable, it’s important that they also understand the risk involved in business ownership. For example, many employees might be willing to become owners until they learn that most times they will have to put their own personal funds in (depending on the structure of the buy-in) to pay for initial ownership interest and fund ongoing business operations. 

Final Takeaway – Tips for Successor Search

When it comes to selecting a successor that is not a strategic outside buyer, there can be more personal attachments and history to consider. In addition to the tips and questions mentioned above, keep in mind some of the following thoughts during these discussions with your clients: 

1. Keep an open mind. The future of any company relies on new ideas and opportunities, so being headstrong or inflexible will not make for a healthy transition. 
2. Avoid micromanagement. Regardless of successor selection, it is important to allow for the next leader to find their own way. Giving them responsibility and time and space to learn from before the owner’s exit will increase a successor’s readiness. 
3. Prepare and be inclusive. The transition should be an open and inviting process for the entire team. Regardless of the assigned successor, having open communication, both internally and externally, allows for the opportunity for feedback and a productive transition period.

BEI believes that some of the best insights and advice come from peers who are actively using Exit Planning strategies in their daily work. For this reason, we welcome content from our members, niche guests, and our strategic partners, as additional ways to provide high-quality advice and resources for you and your planning practice. 

This week, one of our newest partners, CSG Partners, gives a high-level overview of multiple M&A transaction types and the pros and cons of each. Reviewing these M&A options, as well as how they relate to a business owner’s goals will prepare you for conversations with your owner clients.   

Choosing the Right M&A Option for your Clients

By David Blauzvern, CSG Partners 

The difference between a positive liquidity event and seller’s remorse often comes down to strategic alignment. Deal terms and pricing are important, but the right structure often matters more. The “right” transaction generally reflects a business owner’s distinct goals and needs.

Common M&A Options

To illustrate, let’s explore three transaction types: strategic sales, private equity deals, and leveraged ESOPs. Each carries its own unique attributes, pros, and cons. While “perfect fit” is an elusive M&A concept, certain options may offer greater situational utility. With that in mind, we’ll also look at each strategy through the lens of common shareholder priorities.

Strategic Sale

When business owners envision an M&A exit, this option is usually top of mind. Generally speaking, a larger player or deep-pocketed upstart will purchase a seller’s company to gain assets, intellectual property, customers, and/or sales territory.

Pros

• Widely understood process
• Transaction valuations may exceed fair market value
• Strategic buyers often have a greater appreciation of market dynamics and nuances
• That familiarity may facilitate a smoother, post-transaction integration process

Cons

• Confidential company information is shared with potential competitors throughout process
• Sale proceeds are fully taxable
• Employees, including tenured staff and top talent, may not be retained 
• Departing staff are often left with hard feelings and little to show for their efforts

Private Equity

Most private equity (PE) deals are leveraged buyouts. To complete an acquisition, a financial buyer will lever-up a company’s balance sheet with private debt. Once in charge, the acquirer may seek to professionalize operations and drive future efficiencies. 

Pros

• Selling shareholders will often receive a substantial portion of the purchase price upfront
• PE firms generally have the means and expertise to grow and/or scale a business
• Sellers may also financially benefit from future add-on acquisitions and M&A activities 

Cons

• Sale proceeds are fully taxable
• Sellers usually reinvest a portion of their proceeds in the post-transaction structure
• PE firms often have final say in future operational, strategic, and M&A decisions
• Risk of putting excessive leverage on the company

Leveraged ESOP

Similar to a management buyout, a company finances the purchase of an owner’s stock. But in this instance, the buyer is an employee trust, rather than a management team.

Pros

• Sellers can eliminate capital gains taxes on sale proceeds and maintain potential upside
• Company receives tax deductions equivalent to the sale value
• Company can become a tax-free entity as a 100% S Corp ESOP
• Board of directors continues to oversee operations

Cons

• Employee trust cannot pay more than fair market value
• Highly structured deal process
• Regulatory oversight by Department of Labor and IRS
• Outside lenders often provide non-recourse financing, but this may only cover a portion of the transaction (seller notes fund the remainder)
•  

Evaluating M&A Options Vis-a-Vis Owners’ Goals

So, let’s consider these transaction types in light of common shareholder priorities. 

Seeking Complete Business Exit

Owners that want to cash out and not look back should give serious consideration to a strategic sale. This option likely represents the cleanest of breaks – free of continuing management duties and most other ongoing entanglements.

Of course, a third-party sale is subject to capital gains taxes, so a premium valuation can take on outsized importance.

Looking to Gradually Step Back

For shareholders seeking to pare back their day-to-day involvement while diversifying their personal portfolio, a private equity or ESOP sale may be the right option. Both can provide a partial liquidity event with potential upside. Ongoing “skin in the game” takes the form of rolled equity in a PE sale and retained stock and/or stock warrants in an employee stock ownership plan transaction.

Businesses seeking an infusion of outside talent could be well-served by a private equity buyer. These firms often specialize in industry-specific transactions and provide operational know-how and human capital to scale their portfolio companies. The common trade-off is a loss of independence. While selling shareholders may play a role in the restructured entity, day-to-day control is generally assumed by the PE firm.

If a company already has the bench strength to facilitate a gradual leadership transition, an ESOP may be an attractive PE alternative. Sellers and their companies can reap the associated tax benefits with only a 30% sale to an employee trust. Even in the event of a majority or 100% ESOP sale, the company’s board of directors will continue to operate the business, and sellers can continue to earn a salary and a maintain meaningful role, without being obligated to stay. 

Solely Focused on Financial Diversification

While certain owners may be fully invested in their business, it could be the right time to take chips off the table. The case for an ESOP is compelling under these circumstances. Selling shareholders can complete a partial, fair market value sale to an employee trust and still maintain a majority stake. 

Under a minority ESOP, operations and leadership remain largely unchanged, while the company benefits from increased cash flow, thanks to the ESOP’s tax incentives. Employee-owned companies, on average, are also more stable and productive than their non-ESOP equivalents. The stock incentive can help foster increased employee engagement and provide a unique incentive for attracting and retaining top talent.

An employee-owned company also has significant flexibility to accommodate evolving stakeholder goals and future growth. Partial ESOP sales can be followed by a range of transactions including secondary sales, M&A or PE deals, and ESOP plan terminations. As a result, owners have the latitude to actively shape their business legacies even after a minority employee stock ownership plan sale.

In Conclusion

The sale of a company is one of the most significant transactions a business owner will face, and it can have a huge impact on their future and the legacy they leave behind. An educated seller will almost always end up with the best possible outcome among available options. Taking the time to explore the full impact of transaction alternatives, on all stakeholders, puts business owners in a position to avoid surprises while choosing the best path forward.

The idea of creating a full-fledged Exit Plan may seem daunting and expensive to a business owner. However, as we discussed in our previous blog post, the benefits of having a well-crafted Exit Plan far outweigh the costs of time and money. In fact, developing a comprehensive plan with your business owner clients can help create a sustainable business, maximize its value, and reduce risks. 

What exactly does an Exit Planner do to create and execute the best possible Exit Plan? 

As a business advisor, you know that planning for the future is critical to ensuring a successful outcome. It’s one thing to engage prospects and persuade them of the necessity of your expertise in planning. But when it comes to crafting and executing a suitable plan, it can be a complex and complicated process that requires a lot of preparation and collaboration. At this point, you’ve done the work to attract your client in the following ways: 

• The Discovery Meeting
• The Engagement Meeting 
• Overcoming Fee Apprehension

In this blog, we’ll conclude the Exit Planning Process series with an introduction into the Representation Process and the four key steps involved in creating an executable Exit Plan.

Step 1: Hold Data Collection Meetings

The first step in the Representation Process is to hold data collection meetings with the business owner(s). During these meetings, you will:

• Set goals and gain a thorough understanding of the owners’ aspirations, feelings about their businesses, and future plans with and without their businesses. 
• Collect the data necessary to draft the initial business valuation, initial cash flow projection, and financial needs analysis. 
• Ask owners to introduce you to their existing advisors who they want involved in the creation and execution of their Exit Plans.

This step typically takes about 30 days to complete and sets the foundation for the rest of the Representation Process.

Step 2: Create a Discussion Draft

An Exit Planning Advisor knows that no plan can be carried out alone. A comprehensive Exit Plan involves the collaboration and cooperation with multiple advisors, various delegated tasks, and a long-term strategy to ensure a successful business transfer for the owner client. 

Using the information collected during the data collection meetings, you’ll consult members of your Advisor Team and provide them with a Discussion Draft of the Exit Plan that includes your recommendations. Or, for  BEI Licensed Members who use the PlanIt Planning software, recommendations will be computed based on the inputs provided using data collected and added into the program. 

Regardless of how the planning recommendations are determined, using them to form a Discussion Draft is important as it serves as a chance for owners and members of your Advisor Team to: 

• Discuss planning recommendations that will allow owners to achieve their Exit Planning goals
• Allow an open discussion about possible alternatives based on each team member’s background, knowledge, and experience with the owner 

This draft gives owners and advisors an organized and concise point of reference for Exit Planning discussions. The Discussion Draft also helps owners (and advisors) avoid setting unrealistic expectations for the Exit Planning Process and what it entails. 

Step 3: Convert the Discussion Draft into a Working Draft

After owners and all advisors have reviewed the Discussion Draft and offered their ideas and recommendations, you’ll prepare a Working Draft. As the Exit Planning Advisor, you’ll assign recommendations to the appropriate advisors and set feasible timelines and due dates to complete each task and each phase of the plan. Advisors will work directly with owners and/or other advisors to flesh out their recommendations and return them to the Exit Planning Advisor. 

As mentioned above, BEI’s PlanIt software facilitates plan creation and revision. BEI Licensed Members can use templates created with BEI’s PlanIt software to create recommendation summaries.

Step 4: Circulate the Action Item Checklist

The final step in the Representation Process is to circulate the Action Item Checklist. This Checklist is a tool that business advisors use to keep all members of the Advisor Team on task and on time, and matches each task to an advisor with a set deadline.

At BEI, we often refer to the Exit Planning Advisor as the “quarterback” of the Exit Planning Process as it is up to them to make sure every step goes according to the agreed upon timeline. Each member of the Advisor Team completes their assigned recommendations and returns them to the Exit Planning Advisor for inclusion into the Final Plan.

The Bottom Line

Using the Representation Process ensures all relevant factors are considered, and the appropriate advisor is tasked with making and implementing the appropriate recommendations. 

Whether creating a comprehensive plan or a single phase, the Representation Process produces straightforward recommendations for owners and business advisors. It allows owners to choose to directly address a particular concern or engage in a comprehensive process to transfer their company on a date they choose for an amount of cash that achieves their goals.

Reassuring Business Owners during the Representation Process 

It is not uncommon to still be faced with apprehension from owners, even once you have moved into the planning portion of an Exit Planning Engagement. 

For many business owners, it’s crucial to ensure that their business legacy continues after they’ve left the company. This means creating a comprehensive plan that outlines what will happen to the business, its assets, and its employees after the owner departs is essential to securing the desired impact. 

A well-crafted Exit Plan ensures the business continues on with the same level of success that it had under the owner’s leadership while also protecting their personal assets and minimizing tax liabilities.

You nailed the Discovery Meeting and breezed through the Engagement Meeting with your client. 

Now it’s time to discuss fees. 

As a financial or business advisor, you must be prepared for the inevitable question, “How much will this cost me?” Simply quoting a price will not suffice. You need to set the stage for the conversation by explaining the value and benefits of Exit Planning. 

Before we dive in, be sure to check out the first two blogs in this series: The Discovery Meeting  and The Engagement Meeting are essential to the Exit Planning Process!

Benefits of an Exit Plan

An Exit Plan is not just about selling the business for the highest price possible. It’s about creating a roadmap for the future of the business, its employees, and its owner. An Exit Plan helps business owners: 

• Identify their goals, objectives, and concerns, and then develop a strategy to achieve those goals while minimizing risks.
• Create a sustainable business that can continue to operate even without them. 
• Create a succession plan, which ensures that the business continues to thrive even after the owner retires or leaves.
• Maximize the value of their business. By identifying the business’s strengths and weaknesses, an Exit Plan helps the owner create a strategy to maximize the business’s value, making it more attractive to potential buyers or investors.
• Protect their assets and reduce risks. By creating a comprehensive estate plan, business owners can ensure that their assets are protected and passed down to their heirs without any issues. 
• Identify potential risks and develop strategies to mitigate them, ensuring the long-term success of the business.

Overcoming Advisor Apprehension

One of the major concerns that advisors have when it comes to Exit Planning is naming the price. Charging $2,500 for a financial plan, estate plan, or a tax return is one thing, but asking for $10,000 to $50,000 for an Exit Plan can be quite intimidating for both the advisor and the business owner.

It’s understandable why advisors might be apprehensive about quoting value-based fees when they’ve never done it before. Moreover, newly minted advisors might expect business owners to be shocked at the price, making them even more apprehensive.

However, it is essential to remember that creating an Exit Plan is a complex and time-consuming process that requires a lot of expertise, knowledge, and experience. It is not just about filling out forms or providing generic advice. Instead, it involves a deep understanding of the business, its owner’s goals, and the current market conditions.

Therefore, charging a premium for such a service is justifiable. Properly explain to the business owner that the benefits of planning far outweigh the costs. Advisors must help their clients understand that the financial and emotional rewards that they will receive from an Exit Plan far exceed the fees for creating one.

Pricing Strategies

There are a number of different pricing strategies that you can use when quoting the price of an Exit Plan. Determining a fee structure will depend on the owner’s unique situation and needs. Let’s take a closer look at some of these pricing strategies.

Exit Planning Advisors use different strategies to offer their services to business owners: 

• The All-In Strategy quotes a single price for expertise, advice, and counsel for plans costing $3,000 or less. 
• The 50/50 Strategy requires 50% of the fee upfront for plans costing between $7,500 to $12,500. 
• The Monthly-Retainer Strategy involves small monthly payments for a specified period, usually one year.
• The Phased Exit Plan Strategy breaks down the planning process into manageable stages. 
• The Hourly Pricing Strategy is not recommended for Exit Planning since pricing based on the overall value of the plan helps owners understand its true cost and benefits.

For a more in depth overview of various pricing strategies, check out our blog post: Exit Planning Fees: Strategies and Tips for Advisors!

The Bottom Line

Creating an Exit Plan is a vital process for any business owner looking to retire or transition out of their business. While the cost of an Exit Plan might seem hefty, the benefits that business owners will receive far outweigh the costs.

Advisors must understand that charging a premium for such a service is justifiable, given the complex and time-consuming nature of the process. Moreover, advisors must help their clients understand the benefits of an Exit Plan, which include creating a sustainable business, maximizing the business’s value, protecting assets, and reducing risks.

Advisors new to Exit Planning are likely to be more concerned with the cost of the planning than their owner-clients. Therefore, it is essential to properly educate both the advisors and the business owners on the benefits of an Exit Plan, ensuring a smooth transition and a successful future for the business.