Business Exit Planning is a subject increasingly popular in the United States, but is still relatively unknown in Europe, especially in Central Europe. Business owners are often so focussed on running their businesses that the issues of creating or maximizing value in the business, let alone succession or exit planning, are often neglected. However, there is an increasingly large literature and advisory practice focused on assisting business owners to plan for exiting their business.
What will Business Exit Planning do for a business owner?-It will help to establish definite goals (e.g. the value of the business at the time of exit as related to the current value of the business). This typically involves creating a mid- to long-term business plan based on which the current and future value of the business can be estimated. In doing so, a road map is established with performance goals that need to be reached every year in order for the exit target to be achieved. This may also be used to motivate managers and staff in the business, whose bonuses may be linked to the overall plan. This helps communicate a clarified vision to the entire organization, at least in financial terms, and ensure they have a stake in it. Goals need to be established at both the business and shareholder level, as these do not always coincide.
-It typically involves identifying possible obstacles to the exit from the business prior to exit. It is better to identify any skeletons in the closet and solve any known problems prior to commencing negotiations with an investor. Usually these skeletons are only identified after an investor commences due diligence on a company.
These may include:
- Actual or threatened litigation against the company;
- Latent liabilities (e.g. on products, services, construction, etc.);
Contractual liabilities or risks that may be unacceptable to an investor;
- High concentration of revenue among a few clients;
Vulnerability to losing key staff;
Title problems on real estate;
- Possible tax liabilities.
-It may also make it possible to find ways to enhance the value of a business prior to exiting. These may be as simple as improving the number of inventory turns or the ageing of receivables. Or it may include the introduction of new equipment or technology to improve operating performance.
-It allows for tax planning. The objective should not be to maximize the gross proceeds of a transaction, but the after-tax proceeds. Very often, for example, a holding company structure can save large amounts of taxes, perfectly legally. Tax avoidance is legal; tax evasion is illegal.
-It also allows for contingency planning. What happens if the owner dies or is incapacitated? Part of the goal of Business Exit Planning should be to wean the business off any dependency it has on the owners to survive and prosper and some owners also combine Business Exit Planning with an exercise in succession planning or estate planning.
-It makes it easier to identify possible future owners/managers of the business. Is an intergenerational transfer possible? If so, in how many years? Could certain managers inside the company take over the running of the company in the event of the incapacitation of the owner? Would this be an interim solution, or could they become long-term owners of the business, via a Management Buy Out? What would be the transaction related cash-flows, valuations, risks, etc., associated with each scenario? These questions are easier to answer with proper Business Exit Planning.
Such situations often involve a paradigm shift for business owners, from working for their businesses, to having their businesses work for them. This needs to be expertly managed and carefully thought out. Not every owner should consider selling his or her business, but every business owner should consider Business Exit Planning.