Why Do I Need a Transition Plan?
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As a subscriber you can listen to articles at work, in the car, or while you work out. Subscribe NowWhy do you need a business transition plan? Let me give you six good reasons.
1. Exiting your business likely is the most important financial transaction of your life
2. Exiting a business is complex
3. Your financial security, and your spouse’s financial security, depends upon your ability to exit your business the right way
4. Others are depending on you, like your partners, employees, kids, lenders, suppliers, customers and the community
5. Exiting a business is fraught with risk
6. If you don’t have a plan, you’re likely to leave money on the table
Consider this: according to the U.S. Small Business Administration, 80 percent of the businesses that go to market each year don’t sell. That seems impossible until you consider that more than half of all business owners have done no exit planning at all. Two-thirds of business owners either don’t know, or aren’t sure if they know, all of their options for exiting the business. Seventy-five percent of them say they don’t know what their business is worth. Given the dismal lack of planning, it’s no wonder that most businesses don’t sell.
The exit planning process doesn’t have to be overwhelming. Here’s how to start. First, get an independent assessment of the value of your business. One principal reason that businesses don’t sell is that owners tend to overestimate the market value of their businesses. It’s best to get a realistic, independent estimate of what someone else would pay to acquire your business. Second, determine your family’s financial goals, and work with a financial planner to better understand what you will need from the business to achieve those goals. Third, begin to develop a plan for how you will spend your time, how you will exercise your brain, how you will stay active and how you will continue to be relevant after you exit the business. Don’t underestimate the importance of a post-exit plan.
Next, get some professional advice on what exit options are available to you given your specific circumstances and goals. In general, there are five voluntary exit options:
1. Transfer the business to younger generations of your family
2. Transfer the business to the key managers
3. Sell to a third party
4. Sell to an employee stock ownership plan (ESOP)
5. Liquidate
After you identify the exit option that is right for you, or at least narrow the list, commence a focused effort to improve the value of your business. Consider a business consultant or certified exit planning advisor (CEPA). The CEPA certification is issued by the Exit Planning Institute, a national organization. CEPA credential holders are part of an established global network of professional advisors who have successfully completed an executive MBA-style, multi-disciplinary business exit program taught by nationally recognized experts in their respective fields. CEPAs understand the options available for a successful business exit, and they guide business owners through the exit process. CEPAs work with business owners to prepare them, their finances and the business for a transition. Whenever practical, the CEPA works in conjunction with the business owner’s existing team of professional advisors, including accountants, lawyers and investment advisors.
CEPAs also can help you look at your business from a buyer’s perspective. Financial buyers tend to pay for cash flow and discount for risk. So a program to accelerate the value of your business likely would focus on increasing cash flow and decreasing risk. Regardless of which exit option you select, your business will benefit from a value acceleration program.
Finally, remember that exiting a business doesn’t happen overnight, but is a process. From beginning to end, the process could take two to five years. So start now by calling Ice Miller to discuss how to move forward.
<i>Kevin Alerding is a partner and certified exit planning advisor in Ice Miller’s Trusts and Estates practice group.</i>