Best Practices: Exit Planning

Winning Beyond Business

Far too many business owners fail to plan for their eventual exit from the business. For some, it's because they cling to the widely-held myth that a knight in shining armor will come riding along and make them an offer for the business they can't refuse. Others simply get so wrapped up in the day-to-day details of running the business that they never take time to plan for their future.

Without some sort of plan in place, you will likely receive a much smaller financial return on the business than you deserve. Worse, you run the risk of wandering aimlessly through retirement wondering "Who am I?" and "What went wrong?" Conversely, when you make conscious, purposeful choices about when and how to leave the business and what to do afterwards, you end up with an infinitely more rewarding outcome. Winning beyond business -- having a rewarding and fulfilling second half of life -- requires addressing the following issues:

1. Determining when, where and how you will leave the business
   
   
2. Maximizing the value of the business
   
   
3. Identifying your successor (if you decide to transfer rather than sell the business)
   
   
4. Estate planning to protect your assets and transfer wealth with a minimum of taxes
   
   
5. Discovering who and what you are beyond the business
   
   
6. Identifying your true passions and "callings"
   
   
7. Finding new ways to achieve the sense of fulfillment your business currently gives you
   
   
8. Setting a course for the second half of life

By addressing these issues through careful exit and life planning, you dramatically increase the odds of having a successful transition out of the business and into the next phase of life.

Exiting the Business

As the owner of a privately held business, your company represents your biggest and most important asset. According to TEC speaker Peter Collins, the difference between a planned and an unplanned exit can be very significant.

First, understand that as the owner of a privately held business, you have two key roles -- CEO and shareholder. As CEO, your job is to make the best decisions for the business. As shareholder, your job is to make the best decisions about your investment. When it comes time to exit the business, these two roles often do not coincide. Effective exit planning must therefore take into account the differing needs of each role.

It helps to understand the key principles of exit planning:

1. Understand the full extent of exit planning. Exit planning encompasses a wide range of activities that include:
   
   
• Deciding how, when and to whom to sell the business
  
  
• Identifying a successor if you intend to transfer rather than sell
  
  
• Determining what you will do with your life when you no longer own/run the company
  
  
• Taking steps to maximize and protect your assets (estate planning)
  
  
Exit planning also involves a process, not a one-time event. Depending on the owner and the state of the business, it can take several years to develop an exit plan. Once in place, it should be revisited on a regular basis as business and life circumstances change.


2. Separate the job from the investment. Exit planning for the CEO involves figuring out what to do after the business. Exit planning for the Shareholder involves turning an illiquid investment into cash and investing it in something else. In a successful exit, each role accomplishes its separate goals.
   
   
3. Position for the transaction. Selling a business is much like selling a home -- in order to receive full value, you have to get it in top shape. Because positioning a business for sale can take several years, Collins recommends managing the company to maximize shareholder value rather than just top-line growth. By focusing on the areas needed to maximize value, you automatically keep the business in shape to sell.
   
   
4. Time your exit. Receiving maximum value for your business requires selling at the right time, which means paying attention to market and business conditions. Market conditions encompass things like interest rates, merger and acquisition trends and the availability of investment capital. Business conditions have to do with your frame of mind in regard to running the business.

Creating the Exit Plan

To create an effective exit plan, Collins recommends a three-step process:

1. Set goals. This first step addresses three critical questions:
   
   
• When do you, the CEO, want to stop working here?
  
  
• After selling the business, how much would you like to have in the bank so you don't ever have to work again (or worry about it)?
  
  
• When do you want to get liquid, stop investing in this company and invest in something else?
  
  
Answering these questions identifies three important goals: the date the CEO will leave the business, a financial target and the date the shareholder will leave the business. According to Collins, the answers to questions one and three are often very different.


2. Conduct a current state analysis. Step two begins the process of determining how to achieve the goals set in step one. This involves a careful analysis of three key points -- the value of your business, the strengths and weaknesses of your business and your company's strategic position in the marketplace
   
   Start your analysis by determining a reasonable and realistic value for your business and compare it to your answer to question #2 in step one. This identifies the gap between how much your business is worth and how much you need to have in the bank in order to finance your retirement. Next, identify your company's strengths and weaknesses so you can fix any glaring defects or problems. Finally, understand your company's strategic position in the marketplace by asking questions like:
   
   
• Which companies are buying other companies like mine?
  
  
• Which companies are being sought by strategic buyers and why?
  
  
• Does my company fit that profile?
  
  
• Who is likely to be a strategic buyer for my business?
  
  
The ideal time to sell, says Collins, is when your personal goals, the value of the business and market conditions are all in sync.


3. Identify your exit options. Privately held business owners have four basic ways to cash out:
   
   
   • Sell to an outside entity
     
     
   • Transfer the business to the next generation
     
     
   • Sell to the management team and employees (ESOP)
     
     
   • Initial public offering (IPO)
     
     
   Each option comes with its own complex set of issues and questions that need answering. Look at all the available options, comparing them side by side, and identify which one will best help you accomplish your goals.

Understanding the value of your business also represents a key element of the exit planning process. There are four basic approaches to valuation:

1. Asset-based value. This method includes book value, adjusted book value, liquidated value and replacement value.
   
   
2. Earnings-based value. For businesses without a lot of assets, earnings provide a more reliable indication of value. Earnings-based values can vary widely depending on a number of factors, such as pre- versus post-tax or current versus future earnings.
   
   
3. Cash-flow value. The most common cash-flow method involves discounted cash flow, whereby you project future earnings and value that stream of earnings by discounting it according to an agreed-upon number.
   
   
4. Public company multiples value. This method compares public company multiples to private companies by identifying what a similar company is worth in terms of price to book, price to earnings, price to sales, and price to cash flow.

Many owners want to take some chips off the table and still retain control. Collins identifies three methods that work well:

1. Employee stock ownership plan (ESOP). An ESOP is basically a qualified benefit plan that has vesting schedules and contribution limits. Unlike 401K, profit-sharing or pension plans, an ESOP buys company stock, is exempt from diversification and can borrow money.
   
   
2. Re-capitalization (restructuring). Re-capitalization involves forming a new company to purchase the assets of the business.
   
   
3. Multi-stage sale. This kind of deals works best when there are very high barriers to entry or in high-growth situations where a strategic buyer can afford to wait a while to achieve the desired return.

Timing also plays a major role in landing the best deal. To get the most for your business, suggests Collins:

• Don't sell when you're not having fun.
  
  
• Don't wait too long to sell.
  
  
• Be prepared to sell at any time.

Selling the Business

The best time to sell your business, say TEC speakers Peter Collins and Phillip Currie, is when the future of your company looks brightest, not when you've reached a peak or have entered a down cycle. In particular, Currie recommends selling when:

• You have dominant market share or a recognized position, such as price leadership
  
  
• You have some sort of technological or competitive advantage
  
  
• Margins are good and have the potential to get even better
  
  
• You have something -- such as infrastructure, distribution or access to a niche market -- that can be leveraged by the right buyer
  
  
• Your industry and market are in an up cycle

Before posting the "for sale" sign, however, it helps to familiarize yourself with the following concepts:

• Recognize that the company is the product.
  
  
• Look at your company through the buyer's eyes.
  
  
• Understand the buyer's motivation.
  
  
• Enhance the intangibles that make your business attractive.
  
  
• Know the value of your business.

To get the highest price for your business:

• Never state a price for your company. Let the market determine the price by discreetly obtaining offers from a variety of potential buyers.
  
  
• Negotiate with multiple buyers. The quickest way to erode the value of your business is to negotiate with only one buyer.
  
  
• Seek out strategic buyers. A motivated strategic buyer will almost always outbid a financial buyer.
  
  
• Use an intermediary.
  
  
• Understand product and industry life cycles. Sell your company when both of these are on an upward growth curve.
  
  
• Stick with your exit plan. If a deal doesn't jibe with your overall exit plan, don't sign on the dotted line.

How to Sell Your Business

The first step in selling a business, says Currie, involves determining not how much or to whom, but when. Proper timing can increase the value of your business by millions of dollars. It also has an impact on the quantity and quality of potential buyers, and it affects the company's ability to continue on after you sell. Start out by asking these questions:

• When is the right time to sell?
  
  
• Do I want to stay with my business after I sell?
  
  
• To whom should I sell?
  
  
• What is my business really worth?
  
  
• What kind of help do I need?
  
  
• What are the risks involved in selling?
  
  
• What should I be doing now to prepare for the sale?

Smart business owners begin preparing the business for sale long before they actually put it on the market. Currie offers the following checklist to guide your preparations:

• Document your vision.
  
  
• Prepare audited and reviewed financial statements.
  
  
• Make cosmetic improvements.
  
  
• Identify business opportunities.
  
  
• Recast your financial statements.
  
  
• Perform environmental reviews.
  
  
• Purge obsolete assets, excess expenses and non-operating activities.
  
  
• Settle any existing lawsuits.
  
  
• Document operational procedures.
  
  
• Evaluate your management team.

Currie breaks down the process of selling a business into four distinct phases:

1. Preparation:
   
   
• Assess the current state of the business and identify any immediate "value enhancers."
  
  
• Prepare a sale memorandum (also called an "offering" memorandum).
  
  
• Identify and qualify potential buyers.
  
  
• Craft a marketing letter to attract potential suitors.
  
  
2. Marketing:
   
   
• Release the marketing letter through appropriate sources.
  
  
• Respond to interested parties by:
  
  
• Having each prospective buyer sign a confidentiality agreement
  
  
• Starting the process of pre-qualifying the prospects
  
  
• Releasing the offering memorandum to all qualified buyers
  
  
• Responding to their initial round of questions
  
  
• Preparing additional information as needed
  
  
• Conduct off-site meetings to scrutinize the potential buyers.
  
  
• Arrange for prospects to visit your business and "kick the tires."
  
  
3. Negotiating:
   
   
• Collect letters of intent from serious buyers.
  
  
• Strive to create an auction environment among the potential buyers.
  
  
• Select the most promising buyer and announce that you have accepted their letter of intent.
  
  
4. Closing:
   
   
• Both sides conduct in-depth due diligence.
  
  
• Negotiate the "definitive purchase agreement."
  
  
• Sign and close the deal.

To increase your chances of a successful sale, avoid these common pitfalls:

• Not being prepared
  
  
• Failure to check out the buyer
  
  
• Talking to only one buyer
  
  
• Talking with competitors
  
  
• Underestimating the value of the business
  
  
• Premature disclosure

Succession Planning

Succession planning answers the question, "If I die, become disabled or otherwise leave the business, who will run the company and what will happen to it?" According to TEC speaker Mike Kiley, answering this question requires three basic steps:

1. Identify the successors. When it comes to deciding who should run the business after you're gone (assuming you don't sell outright), the options are:
   
   
• Family member(s)
  
  
• Partners and/or shareholders
  
  
• Professional managers or key employees
  
  
• Some combination of the above
  
  
From these options, select a successor according to two criteria -- who you want the business to go to and who is best qualified to run it after you leave. Often, these two people are not the same.


2. Plan for every contingency. The next step involves planning for any and all events -- such as retirement, death or disability -- that can trigger the succession plan. Be sure to identify the appropriate successor in each case, because they may not be the same.
   
   
3. Memorialize the plan. Formalize and memorialize your succession plan by putting everything in writing and creating the necessary legal documents, such as buy-sell agreements, partner agreements and living wills. These documents also specify where the money will come from to facilitate the transition of the business.

In the vast majority of cases, succession planning leads to a smooth, orderly transition of the business upon retirement or the decision to sell. However, in the event of your untimely death or disability, says Kiley, your succession plan should:

• Include an up-to-date financial statement
  
  
• Clearly state what happens with key employees, who is in charge, and what roles they play
  
  
• Identify a board of advisors to help your surviving spouse through the crisis

In addition, Kiley strongly recommends writing a "love letter" to your spouse that details what will happen to the business should you die unexpectedly and whom he/she can turn to for advice. When creating the board of advisors, avoid anyone directly connected with the business. Instead, identify independent, skilled business people whom you and your spouse both trust.

The final piece of the puzzle involves making sure your succession plan supports your estate plan and vice versa. The secret to successful asset protection, says Kiley, is to delegate wisely and well. This involves:

• Creating a team of specialists that includes:
  
  
• A tax-savvy CPA
  
  
• An estate tax attorney
  
  
• A business valuation specialist
  
  
• A life insurance specialist
  
  
• A financial planner/money manager
  
  
• Identifying a team champion, someone who understands all aspects of your succession/estate plan and can communicate your goals to the other specialists on the team.
  
  
• Clarifying your succession planning goals and expectations for your team champion.

To enhance your chances for a successful plan, avoid these common mistakes:

• Failure to plan
  
  
• Choosing a weak successor
  
  
• Lack of flexibility in the plan, particularly as it relates to the sale/transfer of the company
  
  
• Getting so caught up in worrying about tomorrow that you neglect what you do best -- running your company and making money

Finding Fulfillment After the Business

TEC speakers Carl Samuels and Gregg Levoy believe that how you plan to spend your time in retirement has a greater impact on your post-business quality of life than all the business, financial and estate planning issues put together. They also believe that exiting the business presents an ideal time to explore new possibilities and discover (or rediscover) other aspects of yourself that may have been suppressed in the drive to achieve economic success.

The biggest obstacle to this major life transition is that most entrepreneurial CEOs have invested too much of their identity and self-image in the business. Not only do they find it hard to let go of their position and explore other alternatives, many can't even think about themselves apart from the business. Developing a meaningful life means recognizing and accepting that you are much bigger than your business and that life has much more to offer. By shifting your outlook and understanding that you have 25 or more vital years ahead, you can re-invent and re-energize yourself and lead a useful, rewarding post-business life.

To find new meaning and purpose in life after the business, Levoy and Samuels suggest the following strategies:

• Accept your own mortality. The process of life planning begins the moment you realize that the road in front of you has grown shorter than the road behind.
  
  
• Look inside. At midlife, it's not so much what you look for as where you look for it. The information crucial to a successful second half of life lies on the inside, not the outside.
  
  
• Stay in conversation with yourself. During times of intense self-exploration, it helps to stay in close touch with your thoughts, feelings and emotions. This important self-dialogue can occur in many ways, such as keeping a daily journal, engaging in meditation or participating in a group (i.e. church, spiritual or self-help) whose members get together for the main purpose of "waking up."
  
  
• Don't rely on hobbies or leisure activities. For high achievers, personal fulfillment represents an integral component of life. Leading a meaningful life in retirement requires finding something other than the business to provide that same fulfillment. Although enjoyable, hobbies and leisure activities rarely fill the void.
  
  
• Use outside resources. These can include:
  
  
• Books, audio tapes and workshops on personal growth
  
  
• Close friends and confidants
  
  
• Personal coaches and mentors
  
  
• Support groups
  
  
• Your spiritual community
  
  
• Involve your spouse or significant other. Recognize that you're not the only one going through major transition -- so is your spouse and your marriage. Setting off on the journey together will pay tremendous dividends along the way.
  
  
• Listen to the voice of "yes." Identify the forces in your life -- the people, skills, resources and teachings that can help you turn a "no" into a "yes" -- and wholeheartedly embrace them.

The Search for Fulfillment

According to TEC speaker Carl Samuels, the journey to personal fulfillment tends to move through four predictable phases -- shake-up, self-exploration, renewal and integration. Passing through each phase takes roughly a year, with the primary issues in each phase laying an important foundation for the next.

Shake-Up. Shake-up is a precursor of a life transition often known by other names, such as mid-life crisis, paradigm shift or wake-up call. It involves confronting a set of obstacles and challenges that your vast skills and past experience cannot address, let alone solve. Overcoming these obstacles requires letting go of your old self-image and crafting a new vision that can sustain and inspire your new life passion. Key questions during this phase include:

• How much time do I have?
  
  
• Who am I besides my business?
  
  
• What are my priorities?
  
  
• What am I doing that no longer fulfills me?

Self-Exploration. This phase involves examining what was revealed during shake-up. You discover unfamiliar aspects of yourself, parts left undeveloped, hidden or rejected. Rather than avoiding or denying these parts, you begin to mine them as a source of new energy, untapped wisdom and imagination. The fundamental question during self-exploration is, "What do I want?"

Renewal. Renewal is a time for connecting with your new-found vitality, passion and calling. It involves reprioritizing life goals so they mirror your growing new vision. The key question during this phase is, "What is my passion?" Renewal also addresses questions like:

• How would I like to be different as a person five years from now?
  
  
• What do I want my legacy to be?
  
  
• What is my life purpose?

Integration. Integration allows you to put your new sense of self and new life passion actively and consciously into the world. Then, through the art of mentoring, you generously share this "knowing" as a living legacy for your peers, the community and generations to come. The key question during integration is, "How can I serve?"

Finding personal fulfillment involves a cycle of continuous self-exploration, growth and renewal, of constantly pushing your own boundaries and being willing to redefine yourself in new and more meaningful ways. At first, this can feel uncomfortable for entrepreneurs who are used to focusing on their external rather than their internal world. But as you get more comfortable exploring those aspects of yourself that lay dormant for so many years, the journey becomes easier and much more rewarding.

Finding Your True Calling

Levoy helps people align (or re-align) with their passion and sense of purpose in life. He refers to this process of self-exploration as "finding your true calling." He describes a calling as "any urging that comes from the geographical center of yourself and tells you what it will take to make your life literally come true."

Obstacles often get in the way of pursuing callings. Levoy identifies the three worst offenders as:

• Societal pressures. Because callings tend to be disruptive, society rarely trains or even encourages people -- especially those in positions of great responsibility -- to pay attention to them.
  
  
• Self pressures. At the same time, many CEOs feel deeply responsible for the lives of their employees. Hence, they tend to tune out any inner voices that may distract them from running the business.
  
  
• Ambiguity of callings. Perhaps the toughest challenge of all involves picking out a true calling from all the "background noise," the fanciful daydreams that seem like callings but have no real substance to them.

When following a calling, suggests Levoy:

• Accept that sacrifice is inevitable. All growth requires letting go of something, and callings are no different. You have to be willing to give up certain things in order to fulfill your passion and purpose.
  
  
• Identify your passions. Passion is one of the primary channels through which callings make their way into the light of day. It also represents a quick and easy way to get a real sense of where to find your "real juice" in life.
  
  
• Let go of resistance. Rather than fighting your inner resistance, accept it as part of the process. Enter into a dialogue with the resistance, asking, "Who are you? Where do you come from? Where have I heard this before?" Recognize that the inner voices of "no" were instilled in you at a very young age by adult authority figures and that you no longer need to carry them around in your head.
  
  
• Consult your own death. When you acknowledge and accept your own mortality, you achieve ultimate clarity.
  
  
• Get help. Identify the forces in your life that can help turn "no" into "yes." Make a list of all possible resources, mentors and advisors. Include anyone who can help you make the transition, provide a source of inspiration or has done what you want to do.
  
  
• Consider the big picture. In the end, we will all turn to dust. Knowing this can give you the courage to go ahead and take the plunge.
  
  
• Take action. Often, the only way to identify a true calling is to dive right in and see what kind of results you get. Avoid over-analyzing. Just do it!
  
  
• Avoid an "all-or-nothing" approach. Following a calling does not mean dropping everything in your life and taking off on a wild goose chase. Instead, take small steps that gradually redesign your school of thought and your behavior.

Contributing Experts:

Peter Collins

Throughout his 33-year career, Collins has been involved as a buyer, seller and, since 1985, an M&A advisor to private companies between $3 million and $100 million in annual revenues. He has developed a unique program to assist owners in positioning their business for sale and deal with exiting from complex ownership structures. He currently serves as a director of several private companies and is an Independent General Partner of
Renaissance Capital of Dallas, TX, a family of funds that makes preferred stock investments in small-cap public companies. A frequent speaker to business owners on the topic of buying, selling and valuing a business, he has been a featured speaker on Arthur Anderson's Knowledge Network Series and at their Global Best Practices awards in Chicago. A member of the select "TEC 200" club, he has delivered nearly 300 presentations to TEC groups around the world.

Phillip Currie

Phillip Currie is founder of Shoreline Partners, LLC, a San-Diego-based merger and acquisition firm. As managing partner, he has led a variety of merger, sale and acquisition assignments, with particular expertise in strategic transaction planning and value assessment. Throughout his career, Currie has served as corporate director for several companies and has published numerous articles on mergers and acquisitions. A member of TEC 13 for nearly a decade, Currie is also a highly-rated TEC speaker, having addressed dozens of groups on the subjects of "How to Realize the Value of Your Business and What You Should Be Doing Right Now." He has recently introduced a new program, "Strategies to Reach Your Value Expectations."

Mike Kiley

Mike Kiley is the founder and president of the Chamberlain Group, LLC, a Southern California advisory firm specializing in the design of wealth transfer strategies and executive benefits for high net worth business owners. He has more than 20 years' experience in the marketing, design and implementation of executive benefit, business continuity and wealth transfer plans. He currently sits on the boards of several corporations and is involved with a number of charitable organizations. A member of TEC 50 and a TEC speaker since 1984, Mike regularly addresses TEC groups on the subjects of "Estate and Tax Planning for the Busy Executive" and "Succession Planning.".

Gregg Levoy

Gregg Levoy is the author of "Callings: Finding and Following an Authentic Life" (Random House) and has written about callings for the New York Times magazine, Washington Post, Psychology Today, and Readers Digest, as well as for corporate, promotional and television projects. A full-time speaker and seminar leader in the business, educational and human-potential arenas, he is also a frequent guest of the media, including ABC-TV, CNN, NPR and PBS. Gregg's TEC presentation, "The Call to Passion and Purpose," helps members and their spouses align (or re-align) with their passion and sense of purpose to understand their true calling in life.

Carl Samuels

Carl Samuels is the founder and president of Business Life Transitions, Inc. He has received wide recognition for his life transition and mentor's programs, which help entrepreneurs and senior executives create meaningful lives beyond their business success. A former business owner and TEC Chair, Carl has a keen understanding of the issues that shape the personal lives of today's CEOs. His TEC presentation, "The Next Step," helps members and their spouses address critical life-balance, self-identity and relationship issues.

© Copyright 2010, TEC, Inc. All Rights Reserved.

Your use of this website constitutes acceptance of the TEC Privacy Policy and Terms & Conditions.