How Advisers Can Help Clients Build a Business Exit Strategy

Creating a business exit plan is essential to getting maximum value for owners.
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For business owners, their business is often their single largest asset. Establishing an exit plan from the business is crucial to helping them realize the maximum value from the business.

Financial advisers can help business owner clients to craft an exit strategy from their  business. Some people might willingly embrace this help, others may be resistant because they might have trouble seeing themselves as separate from the business.

While your client’s business might be their most valuable asset, translating this into tangible value that they can use in retirement or otherwise after leaving the business takes planning. A business is a relatively illiquid asset, much like real estate.

The first step is working with your client to get a handle on how they plan to transition the business to new owners upon their exit. Some typical options might include:

Selling the business outright to a third-party: This usually involves a cash sale to a new owner. The business owner pockets the sale price and exits the business. There might be variations on this theme such as a requirement that the owner stay with the business for a transition period, or the sale might be part for cash with the rest paid off over time.

They may want to pass the business down to their children or other members of the family. Beyond the estate planning issues involved, you will want to advise them on a buyout strategy that not only creates value for your client but is not financially crippling to the future of the business.

If there are no family members who want to run the company, your client might be interested in selling the business to senior managers within the company. Again a plan needs to be devised whereby these managers would pay your client for the company in a way that doesn’t strap the business for cash, but still allows your client to realize sufficient value from the sale.

Unfortunately, there are situations where the owner dies or becomes disabled before they had planned to leave the business. Life and disability insurance are essential here as a means to provide cash flow to the family or other heirs. In the case where there are other owners of the business, these insurance policies can be used as a means to fund a buy-sell arrangement that essentially buys out the owner’s family and provides them with cash flow and value for the owner’s interest in the company.

Establishing a Retirement Plan for the Owner

If they haven’t done so yet, you will want to be sure your client establishes a retirement plan for the business that allows them to save for their retirement. This can be a 401(k) with a profit sharing component, a SEP-IRA or other options. If there are employees in the business, this can be an attractive benefit to help attract and retain top employees.

Planning should include maxing out individual contributions to the plan, plus any made by the business. In some cases, there are legal ways to skew the amount contributed by the company in the owner’s favor.

This allows the business owner to accumulate a retirement nest egg that is not tied to the value of the business. Should the business not bring as much as the owner expected upon its sale, the money in the retirement account is still there for them. This money is also more liquid and readily available for the business owner, especially in situations where the proceeds from the sale of the business will be paid over a period of time.

Set a Target Exit Date

Part of the planning process includes working setting a target date for their exit from the business. While this can, and often does change, having a target date does help frame business owners’ planning horizon to get their business in condition for the transition to new owners/managers and any other planning steps that will be needed.

Getting the Business Ready

Regardless of how and when the owner plans to exit the business, it’s important that they get the business ready to move forward without them at the helm. This is a key discussion to have with your client to ensure that they do things to properly position the business in several areas, including:

Clean financials are critical, especially to an outside buyer of the business. This means that all financial statements and any required financial filings should be current and accurate. The company retains the services of a competent outside CPA to ensure this happens.

Customer relationships should be moved beyond just a relationship with the owner. Formal agreements with these customers should be in place where appropriate and other members of the business should be involved as well.

An outside, independent valuation of the business may be needed. This can help establish a starting point for an outside sale, or a valuation to be used in conjunction with passing the business on to family members.