Exit Planning Advisory

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email: david@myaacg.com
 
David Hahn, CVA, ASA, MAFF, CM&AA, CCIM, MBA

Exit Planning Advisory

Owners of privately held businesses should consider many options for their business exit. Exit planning scope not only discusses the major options available but also offers a framework for deciding which exit path is best for you.

These options include private equity group recapitalizations, employee stock ownership plans (ESOPs), management buyouts, and gifting programs, in addition to the outright sale of a business.

An exit strategy is not necessarily the sale of your business. Owners should think of their exit strategy planning in broad terms, not just in terms of selling to someone else.

Small businesses can be more difficult to transfer than larger businesses because the owner, generally speaking, is integrally involved in the day-to-day affairs of the business. The riskiness (i.e., survival risk) of those businesses generally rises once the owner's presence is removed.

According to a U.S. Chamber of Commerce Study only 20% of the businesses that are for sale will successfully transfer hands to another owner. The factors that make a business salable include good management teams, steady and defensible profits, customer and vendor diversification and loyalty, a solid reputation, predictable transferability, intellectual capital, and many others.

Reasons why a business will not sell include:
• Owner is too involved in the business for it to transition successfully.
• Keeping family and key employees in the business is more important than selling to an outsider.
• Buyers in the industry cannot achieve financing.


Excellent By-product -
Wealth Management Planning

During the Process of Exit Planning Valuation, we cover the overall wealth management planning.
Most business owners have all of their eggs in the basket called their privately held business. The risks that you took to build and grow the business were worth it at the time. However, now you will want to protect the wealth that you have built by diversifying your holdings. There are five primary buckets, or pools of wealth in which to invest. These categories of wealth are:

1. Cash
2. Bonds
3. Equities (publicly traded securities - stocks, mutual funds)
4. Real estate
5. Privately held business


A diversified wealth portfolio for a business owner will include allocations to each of these asset classes. Of all the asset classes just listed, the most distinguishing characteristic of privately held businesses is the difficulty you face when entering or exiting this asset class. Actively traded markets exist for the purchase and sale of most stocks and
bonds. Real estate, though not as liquid, generally serves as adequate collateral for a financing source to allow for favorable lending terms-hence the dynamic mortgage and commercial lending markets in this country. For the privately held business, however, each exit needs to be constructed on its own merit. Since a majority of your wealth is likely tied up in that business, you should ask yourself this question: What percentage of my total net worth is tied up in my privately held business?

Exit Planning is a customized process of setting goals and deciding how best to achieve them. Whether your successor will be your children, a key employee or an outside buyer, Exit Planning helps you maximize your financial return and minimize your tax liability when you transfer your business. If you die or become disabled before you retire, Exit Planning will help the business survive your departure —enabling you and your family to receive its full benefit.

Valuation is a most important process during the exit planning. We can handle the core process built into the exit planning pocess.



Exit Strategy and Planning

An Exit Strategist helps a business owner understand their exit alternatives, prepare for the exit process, and complete an ownership transfer in a manner that will maximize their potential tangible and intangible compensation, whether it is an outright sale, ESOP, transfer to family members, or other exit method. The work of an Exit Strategist encompasses far more than brokerage services or that of any one professional discipline, such as accountants, attorneys, or financial planners.*

At first blush, the cost of professional exit planning assistance can seem onerous until you understand the amount of work involved and, more importantly, the potential return from the process. In addition to developing and producing reports and supporting documents, a qualified Exit Strategist has a number of additional opportunities to deliver value to a business owner. Eight potential ways in which a business owner can benefit from the services of a professional exit planner are described below.

1. Time and Effort
Many business owners can not devote the time demanded by the importance of this process and can benefit from the time savings an Exit Strategist can offer. Even when the ownership transfer method appears straight-forward, the amount of time and effort required to complete all the necessary tasks can be considerable.

Specific deliverables from an Exit Strategist should include a business valuation; an analysis of operational, financial and legal opportunities to create additional business value; a deal structure analysis and estimation of potential compensation; a trial due diligence; the production of documents supporting the exit strategy; and overall ownership transfer project management. Delivered on a discrete basis, the market value of these deliverables could easily exceed fifty thousand dollars.

There is clearly value in the work and in the lightening of the owner’s burden, but much of the value an Exit Strategist has to offer is knowledge - knowledge that can help increase business value and avoid costly mistakes.

2. Process Knowledge and Support
A qualified Exit Strategist should not only possess content knowledge (i.e. how to do things like improve business value), but should also possess process knowledge (how and when things happen) as well. Given that most business owners have limited experience with ownership transfer events, there can be great benefit in receiving guidance and support by an experienced, dedicated** professional through what is typically an emotionally taxing process.

Measuring the value of professional guidance and emotional support can be difficult, but an Exit Strategist can also deploy tactics that can have a measurable affect on the bottom line.


3. Put money directly to the bottom-line
An Exit Strategist’s ability to understand business value necessitates the ability to assess how business operations and processes affect profitability. As such, an Exit Strategist can be capable of helping business owners make operational improvements that will not only increase the value of their business, but also increase profitability.

In addition to operational improvements, an Exit Strategist should be able to identify any significant financial or legal issues affecting business value.

4. Identify financial and legal issues affecting business value
Accounting methods and financial presentation can have a significant affect on the market value of a business. An Exit Strategist should have a firm understanding of these methods, how they affect business value, and when they should be deployed to improve value. An Exit Strategist should also help identify common legal issues that can affect both business value and the net proceeds from a transfer of ownership.

5. Positioning for sale
Like positioning a product or service in the marketplace, a business must be “positioned” to facilitate a successful ownership transfer regardless of the exit vehicle (i.e. an individual buyer, strategic buyer, investment firm, ESOP, family, liquidator, etc.). This critical process includes determining how the business will be priced, presented, and promoted, all directly affecting both the time it takes to complete a transaction and the total compensation received. An Exit Strategist should have the knowledge and experience to successfully manage this complex, dynamic process to get the greatest compensation in a proficient manner.

6. Confidentiality
Keeping the exit planning process and potential sale of a business confidential can be critical for many reasons. Maintaining confidentiality can be a difficult task under the best circumstances, but virtually impossible without the assistance of a third party intermediary.

7. Negotiations
Any ownership transfer involves negotiations regardless of the method. An Exit Strategist provides a business owner with additional skills and experience in negotiations, plus the ability to negotiate using a team approach. Further, it is almost guaranteed that an exiting owner will have emotional and stressful moments as they go through the exit process. An Exit Strategist can keep perspective during highly emotional periods (typically the culprit in poor negotiations) and help ensure negotiations are carried out in a rational manner.

The focus of this article has been on how an Exit Strategist can increase proceeds, but an Exit Strategist may help a business owner save money by avoiding ownership transfer land mines and pitfalls.

8. Avoid land mines and pitfalls
Research shows that a business owner will likely be involved in 1.1 ownership transfers in their lifetime. Further, a significant number of business owners indicate they have little or no knowledge regarding business acquisitions or divestitures, yet for many it may be the single most important event in their entrepreneurial life. It is a situation that cries for dedicated, professional assistance.

An Exit Strategist’s mission is to obtain the highest tangible and intangible compensation for their client’s ownership interest in a business enterprise, whether it is an outright sale, ESOP, transfer to family members, or other exit method. Their work encompasses gathering and presenting data for decision making, identifying and implementing value building initiatives, developing and producing supporting documents, and managing and facilitating the ownership transfer process.

Business owners can benefit both from the work performed and from the knowledge provided by an Exit Strategist. Research indicates that business owners that invest in exit planning receive greater compensation for their ownership interest. Further, many report recapturing their investment through operational improvements before even going to market.

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