What is Business Owner Exit Planning?

by | August 19, 2010

Allan Vander Hamm is a principal and the Director of Business Valuation and Transition Services at Berntson Porter and Company in Bellevue, Washington.   Allan’s practice focuses on designing and implementing comprehensive owner succession and transition projects; completing successful Merger & Acquisition transactions; and providing business valuations for transition, transactions, buy-sell agreements, divorce and estate and gift tax purposes.   He will be a panelist at our Equinox Focus program on Succession Planning on August 25.


How can exit planning help a business owner make a smooth transition from ownership into an exciting and financially secure phase of life?  How can it put more money into the owners pocket both during ownership and when the business interest is sold?  When and how should an owner start the complex and multidisciplinary process?  Let’s touch on each of these questions.

An exit plan is an integrated process controlled by the business owner and facilitated by an expert in exit planning.  The plan documents a multidisciplinary strategy to transition out of business ownership into a new financially abundant and joyful lifestyle.  It addresses all business, personal, family, financial, legal, tax and operational issues necessary to achieve the owner’s goals.  It increases the probability that the owner will achieve success according to his or her definition, not as circumstances dictate.  A well executed plan takes time to implement.  Most fall within a range of three years to ten years to be most effective.

An integrated exit plan helps facilitate a smooth transition in a number of ways.  The first step is to ask basic questions followed by a more in-depth assessment of personal, family and business arenas.  Initially, as a business owner, do you know:

–  Your lifestyle goals during the transition and after exiting your business?

–  How much cash you will need to live on after exiting your business?

–  How much is your business worth today and an estimate of worth when you plan to exit?

–  How to increase cash flow while you continue to own the business and reduce risk?

–  How to sell your business to a third party while paying minimum taxes?

–  How to transfer your business to family members, co-owners, or employees for maximum after-tax value?

–  How to implement a continuity plan for your business if the unexpected happens to you?

–  How to ensure financial security for your family if the unexpected happens to you?

After answering these and other more detailed questions we identify options that fit best with the owner’s unique situation.  At this point we form a team made up of the owner and other professionals with specific expertise to identify options and develop specific plans in each specialty area that best suit the owner’s personal needs. 

Most plans include the following specialty expertise. 

–  A business valuation identifies business worth, value drivers, cash flow, trends and operating areas to improve.  

–  Estate planning protects assets, documents directives, minimizes taxes and brings security to the family. 

–  Financial planning ensures that cash flow needs are met with minimal risk. 

–  Legal assistance protects the business and helps ready it for sale.  

–  Insurance protects the owner, key employees and family members, facilitates sales to insiders and helps fund estate planning goals.  

–  Tax planning minimizes personal, business and estate taxes. 

–  Depending on the situation merger & acquisition experts, sales generation advisors, capital structuring and banking professionals, family counselors and others may become part of the team. 

The team collaborates to create a detailed plan document.  The document guides implementation by the owner, management and the professional team.  Exit planning results have shown time and time again that the owner has more control, takes away more cash, pays less in taxes, reduces risk, and engages in a smoother transition than if fate runs the show.

A well executed exit plan often generates significant financial and operational benefits to the owner.  For example, a quality business valuation will identify strengths and weaknesses in business value drivers.  Perhaps a broader and deeper management team will allow the owner to reduce time in the business while increasing value to a buyer on sale.  Perhaps the company is dependent on a few major customers.  If management addresses expanding the customer base and increasing revenues, cash flow to the owner could well improve during ownership.  Higher cash flows and lower risk when the business is sold can generate hundreds of thousands to millions in additional total cash to the owner.  There are numerous examples showing how each professional on the team adds unique value.

A savvy business owner can start a formal exit planning process at any time.  Starting earlier increases the likelihood of optimal outcomes.  I recommend starting a minimum of three years before exit to prepare a business for sale to insiders or outsiders.  Seven to ten years out is even better, especially if the most likely buyer is an insider group.  A number of techniques exist to transfer ownership to insiders that result in maximum value to the owner at low risk, but they take time to implement.

I’ve just scratched the surface in this post.  Exit planning is the one of the most exciting and high return processes that a business owner can undertake.  Please call Allan Vander Hamm to discuss the process in more detail, at no charge, for more complete education on exit planning for business owners.