Keeping You Balance: Steps to maximize your client’s exit strategy

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As we all know, an unprecedented number of small businesses are currently owned by baby boomers and the numbers of sold or dissolved businesses is likely to increase dramatically over the next 10 years as baby boomers continue to retire and exit the workforce.

Research reports vary as to the percent of U.S. businesses that do not sell; from 75 percent to 90 percent. That number could change if business owners put a business exit planning strategy in place.  Additionally, an exit strategy could actually help the business owner maximize his profits.

What is an exit strategy? It is a plan that enables the owner of a small business to walk away with what they want to walk away with. And it might not be about making money; business owners often have other goals they want to accomplish, such as establishing a legacy, ensuring that the business remains in the family, or continuing to have a say in what happens in the business.

Getting your clients to plan for next week can be a challenge, let alone plan for retirement. Common responses to the “why don’t we put a plan in place for your future” question include: “I’m too busy running the company;” “there’s plenty of time for that;” “I know what my business is worth;” “my business is my retirement” and, of course, “that’ll never happen to me.”

The information below is not new, nor is it rocket science; it is, however, important for your clients to consider. The onus is on us, as trusted professionals, to bring these topics to our client’s attention and revisit them on a regular basis.

1. Set financial goals. The first step in creating a viable business exit plan and strategy is to determine the owner’s long-term income needs and retirement goals. From this, the owner will be able to determine how much money the sale of the business must generate in order to retire comfortably.

1. Quantify the value of the business. Once your client’s long-term financial goals have been determined, the next step is to figure out the current fair market value of the business. The current value will then dictate whether or not #3 below (building business value) is necessary and, in turn, the approximate timeframe for the owner’s exit from the business. The business valuation is also an excellent tool to help identify problem areas and/or areas of concern in the business.

1. Build business value. If the value of the business is what the owner expected, then the owner’s exit will likely fall in line with the financial goals established. If, however, the value of the business is not as much as the owner expected, then it is likely the owner will need to stay active in the business for a longer period of time to bring the value of the business up to a level that will allow him to exit comfortably.

There are several ways to improve the overall financial condition of the business.

1. Eliminate worthless inventory and debtors. No one wants a business with out-of-date stock or long-term non-payers. If the plan is to sell the business, have your client get rid of both.
2. Prepare the management team. Is your client a key person to the business?  Encourage her to share her knowledge with management and establish a succession team for the business. Suggest documenting daily operations. A few simple how-to manuals can help in a transition. Videos would work as well.
3. Clean up the financial statements. Are there personal expenses included on the company books? Put an end to that practice. Is there real estate or a portfolio of marketable securities in the company that is not needed for the operations of the business? Move them to a separate entity.

1. Strengthen legal and contractual affairs. There are many legal questions that arise when selling a business. Be certain the ownership and structure of the business is in order. Has your client been compliant with the regulators, if applicable? What contracts are in place with customers and vendors? Are those contracts up-to-date?

1. Create a contingency plan. Even with a comprehensive exit plan in place, things can go wrong.  The owner can become physically or mentally disabled, a key employee could leave or die, or a fire or hurricane could completely destroy the business. Planning for these and other types of unexpected situations should be built into every business exit plan. Things the owner should consider as part of a contingency plan include a buy-sell agreement, key employee incentive programs and purchasing business, disability and life.

If your client wants to sell his business for maximum profit, then you need to start planning the exit strategy with him today.

Kristin S. Coffey, CVA, MBA, is the director of Business Valuation Services with Mengel, Metzger, Barr & Co. LLP. She can be reached at [email protected].