How to successfully plan your exit strategy Featured

8:00pm EDT July 26, 2010

It is inevitable that every business owner will leave his or her company one day. Unfortunately, too few will actually be prepared to leave the business on their own schedule and terms.

Instead, many business owners just hope for the best and leave the company in the hands of fate, says Keven Prather, a financial adviser with Skylight Financial Group who specializes in exit and transition planning.

“Some day, either by choice or not, you will exit your business,” says Prather. “It will either be through a planned exit strategy, or it will be involuntarily, but it’s going to happen. So it makes good sense to plan properly and take the necessary time to make that a successful transition, versus the other option, which is usually a disaster.”

Smart Business spoke with Prather about how to successfully plan for the exit from your business.

How do you choose an exit path?

When planning for an exit, business owners are faced with choosing between numerous exit routes, all of which have their own distinct set of advantages and disadvantages. Should the company be transferred to a family member or a third-party? A key employee? Co-owner? Liquidate? Owners should carefully weigh the advantages and disadvantages of each before they decide which exit path will work best for their given situation. Planning ahead and considering all options becomes imperative to a successful transaction.

The planning process should start at least two years before the owner wants to exit the business, and even as early as eight years beforehand. If you wait until you’re at the point where you’re ready to sell tomorrow, there’s not much you can do then to maximize the value of the company.

A lot of business owners say they have a plan, which could mean they may have a will, or may have talked to someone, but there needs to be something more concrete in place. Business owners need a step-by-step process that clearly defines their owner exit objectives and valuation of their business.

How does a business owner get started with the planning process?

Business owners should create a team of experts to help them navigate through the process. Oftentimes, owners will have one or two trusted advisers, but it’s better to have a collaboration or team consisting of an entire cast of the major players: a tax adviser, a CPA, a qualified estate-planning attorney, investment banking professional and a knowledgeable financial adviser who specializes in creating exit strategies for owners. Each specific expert looks at this issue from his or her own perspective and, when all of these advisers work together, a business owner can feel confident that all angles were considered and the most informed decision possible is being made.

Once you’ve created a team, what’s the next step?

Business owners should be prepared to answer a lot of questions from the team of experts. The goal is to clearly delineate an owner’s exit objectives. Objectives must be identified in order to determine the appropriate exit route. What are your goals? Which exit route is best for you? Which one meets your exit objectives? Who are your key employees? How are you going to protect the value of the company? What do you see as the long-term vision for the company?

For some, a sale to a family member may be the No. 1 objective because the owner is looking to transfer the company to someone they know and trust. Others may value the big cash pay-out of a third-party sale and may be eager to wash their hands entirely of the business. Some may only be concerned with the effect of the sale on employees and customers. This is just a brief sampling of the issues that owners must think about when working with advisers.

Are there other exit planning steps an owner should consider?

First, advisers must ascertain all business and personal financial resources. If things are done in a piecemeal fashion, things are often overlooked. You need to know exactly what the owner has on both the business and personal side.

Next, focus on maximizing and protecting the business’s value. If an owner wants to sell to a third party, he or she should work with advisers to find the best possible way to maximize the price and sales terms.

Alternatively, if the sale is to be to an insider, planning must still take place to ensure you know how to transfer your business to family members, co-owners or employees. The last place you want to find yourself is four years into the planning process, only to find out that the key insiders are no longer capable of carrying out this transaction.

Preparation for handling risks is also an important component of exit planning. What happens if the owner dies, or becomes disabled prior to the transaction? What if there is a financial crisis with the business? These types of situations could impose severe consequences to the life of the business. There must be plans in place to ensure that if anything does happen, the business will continue.

Finally, the plan should include personal wealth and estate planning. Exit planning takes business owners through a methodical process that identifies financial goals and objectives very clearly. It’s just as important to quantify what exactly an owner and his or her family needs out of the sale of the business in order to have a successful exit and to support the post-ownership lifestyle they wish to live.

Keven Prather is a financial adviser specializing in exit and transition planning at Skylight Financial Group. Reach him at (216) 592-7314 or kprather@finsvcs.com. Keven P. Prather is a registered representative of and offers securities, investment advisory and financial planning services through MML Investors Services, Inc. Member SIPC. Supervisory Office 1660 W. 2nd St., Ste 850, Cleveland, Ohio 44113. (216) 621-5680. CRN201207-137143