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:
- Specifying the owner’s desired departure date
- Determining how to enhance and maximize the value of the business
- Providing a means to exchange that value for cash in the most tax effective manner
- Ensuring continuity of the business through a smooth transition to new owners
- Indicating whether the owner would prefer an internal transfer or external transfer
- Determining how long the owner would prefer to remain with the company during the transition period
- 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.