If you are a business owner, perhaps the most significant financial event of your life will be the time you decide to leave the company in someone else’s hands. So, what’s the plan?
That was the central point of the Buffalo Niagara Partnership’s recent Speaker Series presentation on crafting an effective exit strategy for business owners, sponsored and presented by Alliance Advisory Group in collaboration with Dansa D’Arata Soucia LLP and GIOIA Capital.
Our panel of experts stressed the importance of planning now, well before the day you want to exit your business. A carefully crafted, comprehensive plan can help you maximize financial return, minimize tax liability, plan for contingencies, and increase the likelihood of a successful business transfer.
Seven steps to creating a comprehensive exit plan
Gregory A. Ahrens, CFP®, ChFC®, CExPTM and Carl A. Lutz, ChFC®, RICP®, CLTC, Exit Planning Advisors with Alliance Advisory Group, discussed the structured comprehensive process that business owners can use to create a strategic exit plan.
“Any good financial outcome begins with a process,” Ahrens said. “There will come a day when you exit your business. That’s inevitable. You’re either going to sell it to someone within the company, sell it to an outside person or group, or hold the company until you pass away. Those are the three exit options. It’s incumbent upon the business owner to choose a path and plan.”
“Business owners should really begin the exit planning process from Day One,” Lutz added. “It’s difficult and it’s definitely not a common practice, but it’s necessary. Otherwise, you might get boxed in. In order to do it effectively, you need to know what’s important to you. Is it financial return? Is it the longevity of the company you leave behind? Something else? The outcome you want will require a very specific plan.”
Ahrens and Lutz outlined the process of creating an exit strategy, outlining a seven-step process:
- Map out exit objectives
- Perform a thorough overview of business and personal finances
- Continue to build and preserve value
- Consider a sale to a third party
- Consider a transfer to an insider
- Ensure business continuity
- Review and update personal wealth and estate planning
Everything you need to know about business valuation
Eric A. Soucia, CPA, CVA, a partner at Dansa D’Arata Soucia LLP, said that it’s important for business owners to have a plan in place from Day One.
“I can’t stress that enough,” he said. “If you’ve got a plan in place, you’re able to react to an opportunity rather than be pressed into selling because you have to. Without a plan, you lose control of the process.”
Soucia said business owners can maximize valuation by thoroughly knowing their business and financial position and approaching the valuation process objectively. He provided a few tips for choosing a partner to assist with the exit process:
- Ensure that you have a plan for management turnover that may occur as a result of the process.
- Diversify your customer base to make your business more attractive to potential buyers.
- Choose an investment banker to handle the bidding process as an independent, objective third party. Once the bidding process has concluded, don’t jump at the biggest number. Carefully evaluate all potential buyers.
Three different types of buyers and navigating the choice
Richard F. Gioia, Managing Partner of GIOIA Capital, shared some strategic insights from his private investment firm and noted that creating an effective exit strategy requires that the business owner first identify categories of potential buyers, as there are pros and cons to each category. These include:
- Strategic Buyers. Typically one looking to enter a new market, gain market share, or eliminate competition, strategic buyers generally offer high valuation for the business and have familiarity with the industry. But working with them requires disclosing confidential information to a competitor and the likely elimination of employees after the sale.
- Employee/Management Buyers. The upside of selling to employees or management with your company include business continuity, employee familiarity and a smooth transition. But on the downside, doing so requires disclosing confidential information to employees and negotiating with people well-known to the owner. And then there are questions such as whether the employees have the capital for the purchase and whether they are ready to run the business—important considerations for business longevity.
- Financial Buyers. These types of buyers include independent sponsors and private equity funds. They typically take an investment position and control the company, looking to improve performance and growth opportunities. Advantages of buyers in this category include high valuations, confidentiality, and flexibility. Disadvantages include a loss of control and a capital structure that could mean the excessive use of debt. What’s more, this type of buyer generally prefers larger businesses.
Get tickets for upcoming events
The Buffalo Niagara Partnership holds Speaker Series events throughout the year. Upcoming topics will focus on sexual harassment regulations, financial health for women, and more. See the full event schedule for event details and registration information.