Leaving a Legacy: Entry Level Exit Planning

With an emergency budget in the UK set for 22nd June, analysts are anticipating an increase in Capital Gains Tax as part of the new Government’s measures to reduce the budget deficit. For business owners looking to sell their businesses this is another factor to be considered as they weigh up the costs involved in the sale, with the revenue that can be generated by it.

Many owner-managers put in a lifetime of hard work building their business only to throw away some of the rewards by failing to consider properly how they will exit from the business — both financially and as a manager. It’s no surprise then that many former business owners express regret at selling their business because it did not realise their personal or business objectives. The truism of the matter is that ultimately business interest must be transferred, either through choice, or through incapacitation or death.

Against such a background the obvious step to take is to develop an exit plan to maximise the value of the business, optimise tax payments, respect the needs of family members who are involved, and ensure personal and financial objectives are achieved.

I’d like to give an overview of the steps involved in exit planning, to demystify and open it up. I don’t want to suggest that it is a task to be underestimated: the preparatory work and planning generally takes 3-6 months and implementation 2-4 years as a minimum.

The first stage involves an evaluation and valuation, before the second stage considerations of maximising business value. After all this background work the plan can be set and agreed on and the external support required (which could be tax experts, lawyers and surveyors, the business owner’s family and so on) identified and brought on side for the implementation of the plan. Work is also needed to optimise the re-investment of the capital realised from the sale of the business to provide for the former owner’s lifestyle.

Central to supporting the business owner should be an exit planning specialist who can co-ordinate the whole process. The objectivity and expertise which the independent specialist in this field can bring is invaluable. While methodologies and blueprints for the process do vary, the evaluation stage should be concerned with detailed observations of, and questions about the business, and include developing a thorough understanding of the business owner’s objectives. At MA Consulting, for example, we have typically 54 questions in the evaluation phase – including the kind of questions which we know potential buyers would want answers to further down the line, relating to the balance sheet, management team strengths and make up, client list and so on. This evaluation supports the valuation process. Tellingly, most business owners misjudge the value of their business, and the external, non-biased expertise of a professional in this field is critical to help a business owner manage his/her expectations and make informed decisions.

A skilled exit planning specialist can then take the process on to look at how the value of the business can be potentially improved by looking at value adding activities covering areas such as stock turn; receivables processing; the structure and skills of the management team; the health of the balance sheet; cash management; EBITDA; the level of involvement of the business owner in the business and its reliance on that individual. The exit planning specialist can make projections and show scenarios of the cost of improving business value in those areas against the augmented company value.

The business owner is then in a position to make well-informed choices and decisions and the plan can be finalised. The exit planning specialist should draw together the best team to support execution of the plan, identifying and commissioning the specialists needed, such as in the area of tax. The exit planner can objectively recommend a corresponding internal team to ensure the plan is bought in to, adopted and progressed. As suggested above the implementation is not a short term activity and structured follow up reviews will be scheduled, both to mentor and support the process, and to evolve the plan if circumstances change.

I hope I have given this subject a fair and straightforward airing. Exit planning should be looked upon as an empowerment for business owners – a route to achieve personal, financial and business goals. If you are a professional with an interest in becoming an expert on exit planning, I recommend that you read The $10 Trillion Opportunity, written by Richard E. Jackim and Peter G. Christman.

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