In May 2024, Lauren Beckett, CFP, CVB, CEPA, FPQP, and I attended another Exit Planning Summit, hosted by the Exit Planning Institute (EPI).
Of the alphabet salad following Lauren’s name, she and I share two designations — CVB and CEPA. “CVB” stands for certified value builder, and “CEPA” stands for certified exit planning adviser (which is issued by EPI).
CEPAs are not particularly fond of the term “exit planning.” Business owners often dismiss the concept because they are not ready to sell their business. However, exit planning is about much more than that. Exit planning is a business strategy that addresses personal, financial, legal, tax, and operational considerations at any point in your journey.
The goal is to maximize the income and value of the business, thus making it attractive and transferable should an owner contend with death, disability, divorce, partner disagreement, financial distress, or burnout. It can also help business owners consider non-financial objectives, such as transitioning the company to the next generation or selling to employees or management.
One of the books I authored, “Build It, Sell It, Profit: Taking Care of Your Business Today to Get Top Dollar When You Retire,” addresses these topics and more. I’ve excerpted answers to some of the most commonly asked exit planning questions below.
1. What should I be doing today to build my business toward maximum value?
Look at the business from the perspective of the buyer. Whatever you can do as you manage your business to minimize risks will protect you now and help you get a better price someday. As you get closer to putting your business on the market, be ready to reassure prospective buyers with a “seller’s package” of detailed documents, audited statements, and workflows to put the best face on your firm. Your business should have sound “curb appeal,” physically and financially.
2. What is my business worth, and how do I find out?
A valuation expert can help determine that. Owners typically find out the business is worth much less than they imagined. Besides cash flow, a variety of intangibles will determine how much a buyer is willing to pay. A buyer wants predictability and safety; it comes back to de-risking.
3. If I sold my business, would I get enough money to maintain my lifestyle?
What would be left after taxes? How much will you spend in retirement? According to the Bureau of Labor Department and the Consumer Expenditure Survey, the average U.S. retiree doesn’t spend much less from age 65-75 as they did when they were 55 or younger (they spend more from age 55 to 64). When you have the answer to those two questions, you are closer to knowing which resources could replace your income and sustain your lifestyle.
Much depends on how well you enhance the value of your business. By learning that value now, you can see how far you must go. And yes, taxes can take a big bite of your proceeds. Professional planning can help keep them to a minimum.
4. What is my next step in life after leaving my business, anyway?
Is there life after business? You need clarity because dreams and ambitions cost money, and expectations must not exceed resources. Sometimes, people retire without knowing what they will be doing, so they fill the void by spending.
5. Who can help me with exit planning? Who should be on my team?
A certified exit planning adviser understands the range of issues involved and can help you assemble your team of other professionals, such as a valuation expert, attorney, and accountant. You also should be working with a financial planner who can guide you through a lifelong strategy to make the most of your money as you meet your objectives.
6. Is it a good idea to leave my business to the kids?
Many owners imagine that they will be handing over the business to one or more of their children, and often they do, either by gifting or selling it to them. The children must be willing and able to run the business, and expectations must be spelled out clearly. The success rate is low: only 30 percent of family-owned businesses survive into the second generation, according to the Family Firm Institute. Just 12 percent survive from the second generation to the third.
7. What are some other business exit options?
Many business owners sell to a partner or key employee, while others sell to third-party buyers. You should know your exit options well before retirement and learn how to find and approach potential buyers. You must be able to shop your business to get the best possible price and terms or work with someone who knows how to find those buyers and negotiate effectively with them. Other popular exit options include employee stock ownership plans (ESOPs), initial public offerings (IPOs), and private equity. Not every exit option is controlled by the owner; forced liquidation and unjust losses must be protected against.
8. If I do sell my business, how do I handle the proceeds?
What is the best way for somebody in your unique circumstances to invest the proceeds of your sale? Your professional team will help you with such matters. You should work closely with an investment adviser and financial planner, as well as with an accountant and an estate planner. These professionals can help you decide the most tax-efficient ways to ensure you don’t run out of money in retirement. Some of those tools include forming the right kind of trust account to protect and distribute your assets and how to maximize income and avoid taxes.
The term “exit planning” can be deceiving. This business strategy isn’t necessarily just for business owners looking to exit. It’s for those who want to protect their company, increase their cash flow, and have a plan to exit at maximum value when the time comes.
This article first appeared in the Berkshire Eagle on July 17, 2024.