Exiting Right Takes Time

Joan M. Ridley, CEPA, CBI, CFP®

Independence, desire for control, image, and prestige – all these describe most business owners. Whether your business is a family affair or not, as a business owner you want to be in control.  But when it comes to taking charge of the future of the company in the event of your retirement, incapacitation, or death, like most business owners, you probably ignore or put off facing the realities for another day.

According to the State of Ownership Readiness done by the Exit Planning Institute in 2013,  53% of business owners “plan” to transition ownership to an external acquirer while 47% “plan” to transition ownership to employees or family.  And yet, 83% do not have a plan, or have not documented or communicated their plan.  Sadly, 47.7% of family owned businesses will fail to pass to the next generation due to inadequate estate planning, failure to properly prepare for transition to the next generation, and lack of liquidity to pay estate tax at the founder’s death (Univ. of Conn. Family Business Program).  That means that the business will need to be sold to pay estate tax and estate administration costs, or to invest the proceeds to support dependents, such as a spouse.  This is especially troubling if your children work in the business since they could find themselves out of a job if the business needs to be sold.

Many family-owned businesses will pass outside the family because the children lack the expertise, maturity, drive, or passion to successfully run the business.  Some children would rather sell the business and keep the cash.  This often happens even after the owner has done estate planning for the purpose of reducing estate tax due at his death.  Others will take advantage of competing opportunities such as marriage or career options that require their move to another area of the country.  If family succession is not an option, you would be wise to start planning now for another exit strategy.

The non-family-owned business owner will face similar issues and opportunities related to exiting from the business as the family-owned business owner.  Both might consider selling to employees or management.  If neither of these strategies will bring top dollar, and if that is a goal, then further planning needs to be done.

You might say that exiting for top dollar is not as important as insuring the happiness of your employees and customers.  That’s a very magnanimous statement, but consider what a ready, willing, and qualified buyer might be willing to pay might not be what you consider top dollar.  The market-place determines the value of a business, and, once you offer the business for sale, it might be too late to correct the issues that deter top offers.  

Could you even achieve your goals if you were to accept less than top dollar?  Before you answer, do some serious planning and conservative projections to determine what amount of invested capital you will need in order to accomplish your post-exit goals.  Remember to subtract out all sale-related expenses and taxes before beginning your calculations.   Don’t forget to factor in post-sale annual income tax and inflation.  Also take into consideration gifts to your favorite non-profits, gifts to family members, health care funding (yours or your loved ones) retirement funding, and funding for your next enterprise, such as establishing your own non-profit.  This all takes money so don’t be too hasty to say you don’t need to realize top dollar.

A well-planned exit could add value and maximize the cash you receive from the sale.  Even the most desirable companies require some sprucing up before inviting a buyer to look under the hood.  If you are considering an exit in one to three years, start preparing now.  If yours is a service-type business where transferring your relationship with your customers and venders will take one to three years after the transfer of ownership, add that to the equation.  For example, if you are 55 now and plan to work to age 60, and if yours is a service business, today would be a good time to start planning your exit.  


Joan M. Ridley (CEPA, CBI, CFP™) is an author, speaker and President of Business Wealth Solutions, LLC. She leads design and implementation of strategies to help business owners exceed their goals before and after retirement. She has more than 30 years of experience advising business owners and managing their business and non-business wealth.   

Copyright 2015 Joan M. Ridley

Posted on January 20, 2016 .