COVENANT BUSINESS PLANNING SOLUTIONS

How to Choose an Exit Plan

In our previous blog, we wrote about the eight different exit plans a business owner can select and outlined a fictional business, Front Range Powder Coating. The three owners of our fictional company are facing the same concerns that you may now be facing: how can the eldest owner exit the business in a way that is mutually beneficial for all three partners, their families and their employees?

We also included the three most pressing issues for these business owners, including:

  • Ben wants to exit immediately for fair market value.
  • Tom wants to continue to work for a number of years but isn’t keen on dedicating the company’s entire cash flow to the purchase of Ben’s stock. Further, Tom figures that just about the time Ben is paid off, it will be his turn to retire.
  • Larry, the youngest, shares Tom’s cash flow worries, but also is sensitive to the concerns of several non-owner managers - the next generation of ownership. Larry wants to remain active in the company for the next 15 to 20 years as its principal owner and knows he can’t indefinitely defer meaningful incentives to the key employee group.

All three have valid concerns and each opinion must be considered when making a final decision.

The three fictional partners of Front Range Powder Coating decided to meet with an advisor to determine which exit strategy would be most fair to all. You can learn from the same advice our fictional advisor gave to these business owners.

First: Start thinking about your exit before you are ready to exit. Owners who give themselves time to plan provide themselves the greatest number of exit path options.

Second: Departing Owners should each put in writing their objectives and the resources available to reach each objective. Those objectives might include the date they want to leave and how much money they will need after exiting the business. Resources include: business value, non-business income and business cash flow. This exercise will help any business owner evaluate how well each exit path matches their objectives and resources. It also encourages frank discussions based on realistic possibilities (rather than conjecture or wishful thinking).

Third: Each owner should outline his or her own objectives related to their desired date of departure, amount of cash desired upon departure and desired successor.

Fourth: Owners should consult with a professional to determine their company’s ‘fair market value’ to place all owners on the same objective page. Valuation results often eliminate potential exit paths. For example: if the value of a company is high but the owner is not willing to devote the time necessary to orchestrate a transfer to employees, a sale to a deep-pocketed third party is a better option for him or her.

Fifth: Owners must perform cash flow projections to determine if there is sufficient cash available to even consider an ‘insider’ purchase; in this case, a purchase of Ben’s stock.

Sixth: Owners must evaluate the tax consequences of each exit path. Keep in mind that while this analysis takes place, owners must continue to increase the value of their companies. Additionally, they will likely need to revise their existing buy-sell agreements to reflect the true value of their business.

In our next blog, we’ll begin to examine each exit path available to business owners.