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"Nearly half of small business owner respondents have not planned an exit strategy for their business.*"

Cause for Concern

An Exit Strategy, or exit plan, is the creation of a specific road map to allow a business owner to successfully exit a privately held business. A proper exit strategy asks and answers all of the business, personal, financial, legal and tax questions involved in selling a privately owned business. The purpose of an exit plan is to maximize the value of the business at the time of the exit, minimize the amount of taxes paid, and ensure that the business owner is able to accomplish all of his or her personal and financial goals in the process.

Whether an owner is looking to sell their business to fund retirement or is ready to enjoy their golden years not working, experts say there are a few steps to take pre-sale to make sure their finances are protected.

Unfortunately, two out of three business owners are not familiar with all of their exit strategy options, according to the Exit Planning Institute’s (EPI) 2013 State of Owner Readiness Survey. More alarmingly, nearly half of those surveyed had not planned their exit strategy whatsoever. Consequently, roughly four out of 10 small businesses struggle with “transfer of ownership,” according to the U.S. Small Business Administration (SBA).

Business owners may face a multitude of hardships should the fail to enforce proper exit planning procedures. Without a defined exit plan the business owner is at risk of:

  • Exiting their companies as a result of pressure from outside circumstances, not as a result of their own desires
  • Exiting their companies on a timetable that’s forced on them instead of one that meets their needs
  • Undervaluing their companies and leave hard-earned wealth on the table
  • Paying too much in taxes
  • Losing control over the process by being reactive and limiting exit options
  • Failing to realize all their business and personal goals
  • Suffering unnecessary psychological stress
  • Watching a lifetime of work disintegrate as a result of poor business continuity planning


Exit Planning Strategy

An exit strategy is a continual process, not an event. Arguably, the best time to begin exit planning is right now. The creation of value and growth with in a private business is a process that affects both immediate and future management decisions. Planning for the eventual exit may relieve burdens and, more likely, preserve value if the unexpected happens.

Regardless of an owner’s specific goal, a team approach is essential to the exit planning process. There are many factors that determine whether or not an owner will be able to implement a smooth exit from their business, a team of professionals will be able to back them up throughout this journey. Some potential members of the team may include the following, a(n):

  • Attorney
  • Accountant
  • Financial Advisor
  • Life Insurance Consultant
  • Business Valuation Expert
  • Corporate Trustee

Utilizing a team of professionals, a business owner may design and implement a proper exit strategy that will give them greater control over their departure and maximize the value of their company; while at the same time minimizing taxes and mitigating the impact of unforeseen losses, legal, financial and personal alike.

But perhaps most importantly, the number one benefit business owners cite is “peace of mind.” A recent survey by PriceWaterhouseCoopers** showed the number one reason private business sales fail or only partially succeed is a lack of planning on the seller’s part. Owner’s who have gone through the exit planning process say they have a new sense of clarity about their options, their stress level is reduced, and they are able to sleep better at night knowing they have a plan in place to help ensure they meet their personal, business and financial goals.

Transition Period

As mentioned before, the best time to start your exit strategy is as soon as possible. The first step an owner needs to take is to define how they want to transition out of their business and what goals they want to achieve by or during the transition period.

Once these issues are defined the owner will be able to properly select a team of advisors that can help guide them throughout this process. The team must include the necessary knowledge, skills and experience in Mergers & Acquisitions, Corporate Law, Taxation and Financial Planning/Wealth Management. It may also include specialists in ESOPs, insurance, personnel and business consulting disciplines. Now the owner will be able to appropriately write out their exit strategy with proper recommendations from their team.

The primary purpose of approaching a business exit in a systematic, goal-focused and planned way is to dramatically increase the likelihood that the outcome will be optimal to the stated goals. The employment of a team of professional and experienced advisors will also add considerably more value by:

  • Mitigating against a failure of the mission
  • Dramatically expediting the mission
  • Intermediating the process to eliminate the risks associated with direct negotiations between principals
  • Increasing the negotiated value of the mission
  • Reducing the income tax burden

The exit is a process, not an event. This process takes time and will impact a lot of people, so owners should put a lot of thought and analysis into it to gain clarity about what the right decision is. In most cases, if owners make the investment of time, they will be rewarded for it. Likewise, if they don't take the time for this type of planning, then they leave their legacy and wealth to chance.


*Exit Planning Institute’s (EPI) 2013 State of Owner Readiness Survey

**PriceWaterhouseCoopers, Whose Business Is It Anyway? University of Connecticut Family Business Program, Family Business Survey

Post by Travis Pence
March 26, 2018