Exit Strategy

How to prepare to navigate the tricky transition from business owner to retiree

More than 50 percent of all business owners are over age 55. It’s likely that there will be significant transitions of wealth over the next decade or so as those owners exit their businesses. As is typical of business owners who tend to channel all their extra revenue back into the business, 76 percent of owners either plan to use their business’s value as their primary source of retirement funding, or do not have enough other assets to enable them to retire at all. Given that situation, it seems like business owners would be racing to complete financial and succession plans to exit their businesses and shore up their retirement years.

However, 79 percent of business owners have no written transition plan, and a little less than half have done no planning at all. Most shocking is that 94 percent of business owners have no plan for what happens after their transition out of their business. That is disheartening considering that many business owners heavily identify themselves with their business. Without that identity, business owners can feel unanchored and depressed. That is also likely the source of the profound regret that 75 percent of owners feel after selling their business.

[To read more of Nerre Shuriah’s thought leadership click here]

With just 20 percent of businesses on the market progressing to sale completion,  owners need more advisory help related to the sale of their business. They are losing millions of dollars every year in lost retirement income and lost wealth that could be transferred to the next generation. The need for advice is even more dire when you consider that 50 percent of business exits are not voluntary. If an owner is forced out of their business due to disability, divorce, disagreement, or a death, the lack of preparation coupled with the pressures of immediacy will inevitably result in loss of proceeds due to undervaluation, high taxes, disagreements among owners, debts, and other factors.

However, business owners aren’t always asking for help. Successful transition of a business requires the help of a team of advisors, including a financial planner, accountant, business lawyer, estate-planning lawyer, life insurance producer, and often a wealth advisor to help manage the project. The process for transition planning cuts across a variety of disciplines: estate and income tax planning, cash flow and retirement projections, asset protection, investment education, business consultation, exit options education and preparation of management, co-owners through buy-sell agreements or next-generation career planning, and conflict resolution management. This confusing and dizzying array of options and actions leads many owners to avoid the issue and just continue to run their businesses as before.

How can the process be simplified? By starting early enough and utilizing a Ready Set Go methodology, business owners can go through a clear and simple process that lets them increase the value of their businesses and be ready for a transition whenever they are ready to activate.

Ready: Preparedness

Set: Structure

Go: Activate

Richard Parker, 55, is a business owner who knows he should have a plan for exiting, but he still enjoys running his company and isn’t ready to think about letting it go. By asking about his plans several years in advance (three to five years is best), his wealth advisor raises the awareness that Richard has some preparation to do and does not have to make a decision about exiting yet. Before Richard takes any planning actions, he needs to determine what his current wellness is both personally and financially.

For personal wellness, Richard will create a personal vision statement—a very specific vision listing the amount of wealth he needs to exit, as well as his personal and family goals. What Richard will do after he leaves his business could be the single most important question. He will need to align his vision with that of his spouse and children (if he has them).

By starting early enough and utilizing a 1-2-3 Ready Set Go methodology, business owners can go through a clear and simple process that lets them increase the value of their businesses and be ready for a transition whenever they are ready to activate.

Next, he must look at his business’s wellness: What are his current revenue, profit, and EBITDA scores, and how do they compare with industry companies that are considered A grade? That difference between the multiplier used to gauge the value of Richard’s business and the multiplier that his competitors use will show the gap in value of Richard’s business. The value gap is an opportunity for Richard to build value and reduce risks before he is ready to exit.

Richard will also set a score for the readiness and attractiveness of his business for a sale. Business readiness is a quantification of all the factors that should be considered to determine whether a business is ready for a transition, such as operating processes that have been documented and do not just exist in the owner’s mind, contracts with vendors and clients, a diversity of clients, financial books that are audited and devoid of personal expenses, a clear marketing strategy, competitive compensation and other benefits that reward key employees and managers and reduce turnover, and so on. Attractiveness is how appealing a business looks to third-party buyers, including private equity and/or management. Such factors to consider are forecast factors: Is the business in a growth cycle or decline cycle? What does the market look like for the industry? What is the branding of the business? These and other business and investor factors that affect the decision to make a bid must be considered.

Both the personal wellness and business wellness factors can be scored so that Richard can see where he stands now and what he needs to do to get his scores to a level that will provide him the exit value he needs and wants to be successful in his transition. In order to move his wellness scores, Richard engages in preparation. Depending on what he needs, that could include estate planning to shore up his documents and discuss his plans with his family, or retirement planning where he projects his cash flow throughout his lifetime to see what he needs to maintain his lifestyle and be ready for unforeseen events such as illness, as well as other areas of planning.

Once Richard completes the preparation stage, he moves to structure. What exit option is best for him? This step requires education. Richard should learn about his external options (third-party sale, strategic sale, investors, public offering, or liquidation or asset sale) versus an internal option (transition to family member, employees in an ESOP, management buyout, sale to a co-owner, or just maintenance of the business to provide a stream of income to continue his lifestyle). Through a process of elimination, Richard matches his personal and business goals with the advantages and disadvantages of each option to select one or two that he would like to consider. The benefits of this process are that once selected, Richard does not need to do much more to trigger the event whenever he is ready, as he has already increased value and prepared himself and his business for a transition.

By simplifying the transition process and asking questions early, business owners can be motivated to build and run a better business. Value gaps can be quantified, and identifying them ensures that they are steered toward expert advice to close those gaps and increase business value.

The wellness scores help business owners clarify priorities and why and how business planning, personal wealth, and personal life planning should be done for each individual. Moreover, review and analysis of the business, personal wellness, and personal and family wealth strategies highlight the need to build a team of advisors with one advisor acting as project manager for the entire process. That reduces the chance of a business owner feeling overwhelmed or stalling and leaving the transition process incomplete. Helping and advising business owners through a simplified process ensures they get the most value for their life’s work and accomplish their goals for the future of their businesses and their families.

[For more on First Citizen’s Bank approach to Private Banking click here]

Are You a C-Suite Advisor?

Inquire about Memberships Today

Learn More