An exit plan is a comprehensive road map to successfully exit a privately held business. It asks and answers all of the business, personal, financial, legal, and tax questions involved in selling a privately owned business. Its purpose 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 their personal and financial goals in the process.
Most Don't Have It
Despite the tremendous value of exit planning, most owners of emerging growth companies that are trying to get out of No Man’s Land do not have an exit plan. In fact, only an estimated 28 percent of private businesses have done any exit planning so more than 70 percent have no
exit plan at all. Due at least in part to a lack of planning, only 30 percent of family-owned businesses survive through the second generation. The bottom line is that too few business owners are proactively planning for the inevitable exit process. They typically are too consumed with working “in” the business and they fail to work “on” the business. Further, they keep procrastinating and putting off the important planning piece.
Every business owner should begin with the end in mind and have a strategic exit plan regardless of their age or the stage in the life cycle of the company. Venture capitalists who fund start-up companies will not invest in a business unless they believe the founders have a good exit plan. Private equity groups will not buy or invest in a successful middle-market company without developing a detailed exit plan for themselves prior to investing.
Position to Maximize Value
One of the goals of the exit plan is to position the company so it can maximize value at the time of sale. Since many value enhancement projects take time to implement and show results, business owners should begin the exit planning process at least 3-5 years before they want to completely exit the business. This helps ensure a successful exit through a continued focus on the value factors and value drivers in the business. It also enables the business owner to assess the various exit options at their disposal including: Transfer to family; Sell to other shareholders; Sell to management (MBO, LBO); Sell to an ESOP (employee-owned); Sell to a third party (strategic buyers, financial buyers; private equity); Refinance or recapitalize the business (raise capital, take some chips off table); Going public (IPO, DPO); etc.
A well planned, realistic strategy to exit the business at a desired level of valuation or pass it on to the next generation of the family is indispensable to all emerging growth companies.
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Contact Bill at bill.reading@newportboardgroup.com
