Thursday, May 31, 2012

Exit Planning Step 2 - Financial Needs

Once the personal, financial and business exit planning goals have been clearly identified, the next step involves determining the business owner’s financial needs upon exit.  In other words, what lump-sum amount is required upon exiting the business (including from the sale of the business) to enable the business owner to achieve the goals defined under Step 1?

A certified financial planner (CFP) can assist with this aspect of the exit plan.  Financial planners have access to financial models that help project the amount required based on various underlying assumptions.  Future projections are inherently uncertain.  As a result, it is useful to consider different scenarios (e.g. best case scenario, worst case scenario) by altering one or more of the key underlying assumptions.  Some of the underlying assumptions to be considered in this regard include:
  1. Annual spending and expenses upon exit/retirement (e.g. living expenses, travel, donations, family support, etc.);
  2. Amount of other post-retirement income expected (e.g. employment, consulting, investment, etc.);
  3. Value of the other non-business assets (e.g. marketable securities, real estate, insurance, etc.);
  4. Life expectancy and mortality factors; and
  5. Anticipated rates of return, income tax rates and inflation rates.
The projected lump-sum amount required upon exit is then compared to the business owner’s current situation to identify any gaps or shortfalls.  This sets the stage for determining action plans to close these gaps, which is dealt with later in the exit planning process.

The financial needs assessment should also include a more comprehensive financial plan to better manage and protect the business owner’s wealth going forward, in accordance with the stated goals.  Some important questions to be addressed include:
  1. Is there a current will and power of attorney?

  2. What estate planning can be done to help protect assets and minimize taxes (e.g. estate freeze, family trust, etc.)?

  3. What insurance (type and coverage) is required to help protect the business, the business owner and his/her family (e.g. life, disability, critical illness, key person, buy/sell clause)?

  4. Can corporate-owned life insurance be used as an investment vehicle to help maximize returns?
In addition to the financial planner, certain other professionals should be consulted for their experience and expertise relating to these questions, including:  
  1. Lawyer (wills & trusts, tax & estate) – draft wills, assist with tax and estate planning

  2. Tax accountant – assist with tax and estate planning

  3. Insurance professional – ensure appropriate and adequate insurance is in place to meet goals

  4. Business valuator – business share valuation for tax and estate planning or for benchmarking purposes.
The specific role of a business valuator for benchmarking purposes will be discussed more next week under Exit Planning Step 3 – Business Valuation.

Thursday, May 24, 2012

Exit Planning Step 1 – Defining Goals

An exit plan begins with a concise statement of the business owner’s personal, financial and business goals.  These provide the framework against which all exit planning decisions are made.

Each business is unique and each business owner will have his/her own personal, financial and business goals.  These unique goals will drive the creation of the exit plan.  There are, however, common elements or goal categories to all exit plans, including:
  1. Specifying the owner’s desired departure date
  2. Determining how to enhance and maximize the value of the business
  3. Providing a means to exchange that value for cash in the most tax effective manner
  4. Ensuring continuity of the business through a smooth transition to new owners
  5. Indicating whether the owner would prefer an internal transfer or external transfer
  6. Determining how long the owner would prefer to remain with the company during the transition period
  7. Providing security for the business owner and his/her family upon a planned departure or in the event of an unplanned departure (e.g. death, disability, etc.)
To be effective a goal should be specific, measurable, achievable, realistic and motivational.  For example, "To maximize the value of my business when I exit" is not specific or measurable.

A much more effective and clearly defined goal would be:
"To grow my business from an enterprise value of $15 million to $25 million within 5 years so that I can sell to a third party buyer for at least this amount and net $16 million after taxes and other liabilities while remaining with the company under a consulting contract for 6 months to 1 year before retiring to enjoy my hobbies and travelling with my family."
Prioritizing the business owner’s goals is also important as certain goals may conflict.  For example, it may be extremely important for certain owners to see the business stay in the family.  Unfortunately, this exit option usually conflicts with being able to maximize value or price as third party financial or strategic buyers are generally willing and able to pay a higher price.  As such, the owner may have to make certain sacrifices to ensure an internal transfer to the next generation (e.g. accepting a lower price, receiving payment over time, staying active in the business for a longer transition period, etc.).

Studies have shown that people who write down their goals are more likely to achieve their goals than those who do not.  This speaks to the effectiveness of accountability and commitment in accomplishing one’s goals.  Step 1 in the exit planning process is by far the most critical step.  An effective exit plan can not be created without taking the time to carefully consider and define the business owner’s personal, financial and business goals.

Friday, May 18, 2012

Exit Planning – The 6 Step Process

According to Gary Ford and Connie Bird, authors of "Life is Sales", three common attributes of successful people are initiative, persistence and assertiveness.  It is these qualities that drive entrepreneurs to build successful organizations and it is these qualities that empower business owners to prepare for a voluntary or involuntary sale of their businesses through an exit plan.

To develop an effective exit plan the following 6 step process must be undertaken:


Brief Description

Goals Assessment

  • Identify business, personal and family goals
  • Provides a frame of reference for the entire plan
Financial Needs Assessment
  • Quantify how much is needed (from the sale of the business) to achieve the goals
  • Considerations include annual spending, expected rates of return, inflation, life expectancy, etc.
Business Valuation
  • Obtain a current business valuation – at least 3 to 5 years prior to exit
  • Identify and implement measures to increase business value before exit
Exit Option Analysis
  • Assess the advantages and disadvantages of each exit option 
  • Identify which exit option(s) will best accomplish the goals
Net Proceeds Analysis

  • Calculate net proceeds to be received under each exit option based on various value/sale price assumptions
Action Plan
  • Identify and prioritize specific tasks to be undertaken 
  • Assign responsibility to individuals and identify timing of each task
  • Schedule regular meetings (e.g. quarterly) with those accountable to ensure progress

The exit planning process is a comprehensive process that addresses the business, personal, financial, legal and tax issues that are involved in exiting from a privately owned business.  When it comes to exit planning, business owners ultimately have three choices: (a) do nothing; (b) prepare the plan themselves; or (c) seek professional assistance.

To ensure an efficient process, business owners should give serious thought to the above noted steps before seeking professional assistance.  A team of professional advisors can provide real value throughout the exit planning process.  According to "RBC Business Succession Planning: Your Essential Road Map", assistance from many of the following professionals may be required at some point in the process:

  • Family business advisor
  • Chartered accountant
  • Lawyer (corporate, tax, estate)
  • Business valuator
  • Insurance / financial advisor
  • Commercial banker
  • Business broker
  • Investment advisor / wealth manager

Knowing when to call upon experienced professionals to ensure that the plan is technically sound and will meet the identified goals is critical.

Over the next 6 weeks, I will discuss in greater detail each of the above noted 6 steps to developing an effective exit plan, highlighting how and when specific professional advisors can assist.

Thursday, May 10, 2012

Developing an Exit Plan – The Benefits

All privately held business owners will one day exit their business.  The exit will be voluntary (at a time of the business owner’s choosing) or it will be involuntary (due to burnout, illness, disability, marital problems or death).  An exit strategy is needed to ensure a voluntary exit.  A contingency plan is needed to be prepared for an involuntary exit.  Either way - a plan is needed!

The largest transfer of private wealth in history will occur over the coming decade.  Some estimates have this transfer at $10 trillion in the U.S. and $1.3 trillion in Canada.  The increasing supply of businesses for sale will create a buyer’s market, in which buyers will only pay top dollar for the most attractive businesses.

In a Newport Partners survey of more than 100 Canadian business sellers, 62% recommended methodically pre-planning the sale of a business two to three years in advance.  Business owners that come to market unprepared will likely sell for a discount, potentially significant, to those that have invested the time and effort to prepare for sale.

Developing an exit plan provides a tremendous return on investment.  Some of the major benefits of having an exit strategy include: 
  1. Maximize business value, saleability and price;
  2. Minimize taxes paid on sale of business;
  3. Regain control over how and when the exit occurs;
  4. Ensure business and personal goals are achieved;
  5. Minimize stress and conflict among the business owner, employees and family; and
  6. Ensure continuity of the business.
Despite these benefits, many business owners avoid the topic of retirement, succession or exit planning.  Recent studies have indicated that less than 25% of Canadian business sellers actually took the time to pre-plan the sale of their business.  Why is this the case? According to the CIBC/RBC Business Monitor (Q1 2010), the biggest succession planning challenges for business owners included:
  1. Getting the appropriate value for the business;
  2. Not ready to give up control or management;
  3. Finding the right successor and successor financing;
  4. Too complex and too many issues to deal with;
  5. Not enough time; and
  6. The family’s role in the succession;
It’s no surprise that there are many challenges and obstacles to developing and implementing an effective exit plan.  However, the benefits far outweigh the costs and there are resources for business owners to turn to for assistance.

In the coming weeks I will continue to share valuable information on the topic of exit planning, including the 6 steps to an effective exit plan and the professional resources that are available to assist business owners in this process.

Friday, May 04, 2012

Business Plans Are Not Just For Start-Ups

This week I want to discuss something vital to businesses at every stage of their life cycle – Business Plans.

Most people recognize the importance of business plans for start-up companies.  However, business plans are equally important for established businesses operating in high growth, mature or declining industries.  Studies show that business plans increase the odds of business growth and raising capital.  Without a business plan the chances of success are greatly diminished and the likelihood of a catastrophic failure is increased.

Here are 6 reasons why all companies should have a business plan:
  1. Raising capital - dealing with the concerns of lenders and outside investors (e.g. how much money is required, how it will be used, how it will help achieve the company’s goals, how much risk is associated with investing in or lending to this business, etc.)
  2. Increasing the likelihood of success – studies show that failure rates for start-ups is between 30% and 50% within the first few years - a major reason why start-ups (and established companies) fail is lack of adequate planning
  3. Measuring success – the business plan defines what success means to an organization by setting out the company’s goals and objectives (financial and non-financial) – actual performance can be compared to the plan and achievements can be celebrated
  4. Providing direction for management – a successful business requires a cohesive management team where each member knows his/her role and responsibilities, understands how that fits in with the overall goals of the organization and is accountable to each other for achieving those goals
  5. Decision making – better quality information leads to better business decisions. A thoroughly written and well researched business plan will arm the owners and management with the knowledge to make better decisions
  6. Documenting forecast achievement – proving to future lenders, investors and potential purchasers that management has the skill and ability to plan, implement and achieve a growth plan – this lowers a company’s risk profile and increases its value  
The business plan is a comprehensive and dynamic document that should be revisited annually and include the following sections:
  1. Executive summary
  2. Business overview (including vision, objectives, ownership structure)
  3. SWOT analysis (strengths, weaknesses, opportunities and threats)
  4. Products and/or services (including any proprietary technology)
  5. Economic and industry review (including market research)
  6. Operational plan (including management team and human resources)
  7. Marketing strategy
  8. Financial plan (start-up costs, capital needs, financial projections)
  9. Exit strategy
Revisiting and revising the business plan annually is necessary for dealing with changes in the company’s direction, strategy, market and ownership.  An exit strategy for the existing shareholders should be incorporated into the business plan, particularly for established businesses.

Join me next week as I begin a series of entries dedicated to the various issues surrounding the development of an effective exit strategy for business owners.