Most business owners have taken no actions to protect their family’s most valuable asset: the business. They have made no plans to exit the business. They likely do not even know the value of their business.Approximately, 70 million baby boomers own 12 million privately-owned businesses, 70% of which will sell or close in the next 10 years.  CPAs are in a unique position to assist their clients in the successful transition of their business.  In addition to knowing the financial position of the business, many CPAs understand the business owner’s personal financial standing and family dynamics, that is, they know the big picture.

Why don’t business owners plan for their exit?  The owner has nurtured the business to maturity, employees are like family members, the business owner’s personal identity is closely tied to the business, and it is difficult to let go.   The business owner may believe they have plenty of time to plan because they are not ready to exit.  This mindset ignores the fact that many transitions are unplanned.   Death, disability, and disputes with co-owners are common.  In order to maximize the value of their business, owners should always be ready to exit regardless of when or how.

An exit plan integrates the business owner’s personal and financial goals with a comprehensive plan that addresses maximizing business value, personal financial planning, and life after business planning. Whether the owner intends to sell to a third party or plan a generational transfer, the exit plan is designed to build, harvest, and preserve family wealth by integrating sound business practices into daily operations.   Exits planned several years in advance generate the best outcomes.

1.  Maximizing business value begins with identifying the key value drivers in the business that relate to growth and risk. This information becomes the basis of a plan that sets measurable goals with firm timelines, monitors progress, and makes amendments as needed.
The CPA can assist the business owner in discovering opportunities for improvements to increase value and uncover any problems that may derail a sale.  An exit plan allows the business owner to take corrective action prior to beginning the sales process.

a.  How attractive is your business to a buyer?  Does your business have the following characteristics?

• Diversified customer and supplier relationships
• Documented systems and processes
• Developed next level senior management
• Documented and proven growth strategy
• Accurate financial information

b.  Always be ready to sell.  Know the value of your business.  Not being ready can result in a failed transaction or a transaction for significantly less that the original price the buyer was dangling in front of the seller.
Buyers are likely experienced deal makers.  Most business owners are not.  It is vital to have an experienced team of advisors that already know the owner’s business and exit plan.  Otherwise, the selling business owner puts himself at an extreme disadvantage.

c.  Analyzing the pros and cons of all exit paths.

i. Sale to third parties:  The business owner needs to determine if the business is of sufficient size and quality to attract a buyer.   Business owners who choose to sell to a third party must assemble a team of advisors and begin years in advance to a) identify and implement strategies that are most attractive to buyers, b) monitor current market conditions, and c) determine which sales process will result in the best price and terms.  Business owners receive many solicitations to sell their business from business brokers and private equity groups.  How does the business owner know if the buyer is legitimate, or if this is the maximum price the owner could receive?   An optimum price can only be achieved by being proactive in the sale process, not through reacting to unsolicited offers.

ii.  Sale to family or insiders:  Pre-planning can result in a smooth, tax efficient transfer to family members or management when they are fully ready to take over.  The business owner may wish to stay involved and maintain a level of control while phasing in the ownership transfer.  Funding may be provided by the seller, an ESOP, or investment by a private equity group.   The exit planning process considers the entire family, including those members that do not plan to work in the business.  The business owner may wish to make equalizing payments to children that are not involved in the business.

iii. “I’ll die at my desk” is one path that many business owners select.  This does not mean that the business owner should not plan for this eventual exit.  A change of health or change of heart may prevent the business owner from steering the business through changing landscapes and economic cycles.   If the business is to succeed beyond its owner, it must be able to run without its owner.  This option may be the only alternative.  A significant number of businesses are merely a job and not a business.  “Profits” are really the earned income of the owner.  This leaves little to no profit to create a positive value for the business which is problematic if the owner is counting on a big payday from the sale of the business to fund retirement.

iv. Addressing co-owners: Plans should be documented in a buy-sell agreement that is updated regularly.  If owners have different exit timetables, the business may need to groom senior level employees who can take over the duties of the departing owner(s).  The remaining owners need to understand their financing alternatives.

2.  Personal Financial Planning   A business owner needs an investment plan that incorporates income tax, investment, insurance, retirement and wealth transfer strategies.  The business owner needs to know if there is a gap between asset values and future expenses based on personal financial needs and lifestyle choices after the sale of the business.   If a gap exists, the CPA can assist the business owner in increasing the value of their business and/or modifying their retirement plans.

3.  Life after business planning   A recent study by PWC showed that 75% of business owners regretted selling their business 12 months after the closing.  Why? They did not prepare.  The personal identity of the business owner is closely tied to their business.   Business owners view “retirement” differently than most Americans.  Transitioning out of a business does not mean slowing down or endless days of rest and relaxation.  It is a new, active life stage characterized by continued personal growth and new beginnings in work and leisure.

CPAs are uniquely positioned to work in consultation with their client and their clients’ other advisors to assist business owners in developing and maintaining an exit plan to preserve their families’ greatest assets.