Presented by T. Ray Phillips
According to Paul Simon, there are 50 ways to leave a lover. Not being as creative as Mr. Simon, we’ve only come up with eight ways for owners to leave their companies:
1. Transfer the company to a family member;
2. Sell the business to one or more key employees;
3. Sell to key employees using an Employee Stock Ownership Plan (ESOP);
4. Sell the business to one or more co-owners;
5. Sell to an outside third party;
6. Engage in an Initial Public Offering;
7. Retain ownership but become a passive owner; and
8. Liquidate.
Given the right circumstances, one of these paths may be appropriate for you. The process of determining exactly which path is best presents an obstacle to many owners. If, however, you wish to “leave your business in style,” we suggest that you work through this three-step path selection process.
Establishing thoughtful objectives lays the foundation for an Exit Plan. Doing so well in advance of your departure gives you and your advisors the time necessary to make your goals a reality. As you work through this path selection process, you will synthesize or harmonize your exit objectives with the characteristics and capabilities of your company as well as with the external realities of the marketplace.
Choosing a Path
1. Step One
First, you, as an owner and with the help of your advisors, identify your most important objectives. (Please contact us for issues of this newsletter that further explain how to identify and quantify your objectives.) These objectives are both financial (“How much money will I need from the transfer of the business to assure my, and my family’s, financial security?”) and non-financial (“I want the company to stay in the family,” or “I want to remain involved”).
Internal and external considerations also impact an owner’s choice of exit path. For example, the owner who wishes to transfer the business for cash, but is unwilling to trust his company’s and his employees’ fate to an unknown third party, may decide that an ESOP or carefully-designed sale to a key employee group is the best exit route.
Exterior considerations that may impact the choice of exit path include business, market or financial conditions. For example, the option of selling your business for cash to an outside buyer may be eliminated because of the anemic state of the M&A market.
2. Step Two
As you develop consistent objectives and motives, you then must value your company and determine its marketability. This analysis usually provides direction and can eliminate potential exit paths.
For example, if the value of a company is high and its marketability is low (perhaps because of the depressed state of the M&A market), an owner may decide that a sale of the business to an outside party is impractical. Instead, selling to an “insider” (co-owner, family member or employee) may be a better option.
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Quantify Your Resources: The Ultimate Exit Test
Tuesday, December 13th, 2011Presented by T. Ray Phillips
In the first Step of The Seven Step Exit Planning Process™, you, as an owner, establish three primary exit objectives:
The date you wish to exit;
The amount of cash you want upon exit;
and Your choice of successor.
Today, let’s look carefully at that second objective: How much cash will you need from the sale of the company to enjoy a financially secure post-business life? For most owners this is a great starting point for determining when, or if, they can leave their businesses.
Peter Daniels was the 58-year old (fictional) owner of Daniels Food Processing, Inc. He had engaged his financial advisor to:
Set a realistic assumption for a rate of return on Peter’s investments;
Research actuarial information to determine average life expectancies for both he and his wife;
and Help him and his wife agree on and establish an acceptable post-exit annual income amount.
As part of this process, Peter and his advisor reached the critical question whose answer would determine Peter’s ability to retire on his terms: What must the value of Peter’s business be if Peter is to leave, as he desires, at age 63?
Like Peter, your resources are likely both in the business and outside of it. You need to know the value of both so you can determine if there is a gap between the amount of money you will need in the future and the amount you have today. This gap must be quantified and—to exit successfully—you must create and implement a plan to close that gap. Most owners retain an experienced financial planner to help with this project.
Peter and his advisor used the following process:
First: Peter and his wife (Pam) agreed on their future annual income needs. They believed that they could live on $200,000 per year (95% of their current income) and would require that level of income for approximately 30 years (based on their life expectancies).
Second: Peter and his advisor, using their agreed-upon estimate of a projected rate of return, calculated that Peter’s non-business investments assets would be worth approximately $500,000 in five years (Peter’s desired exit date).
Third: Peter’s advisor calculated that the amount of investment capital needed to pay Peter and his wife $200,000 per year for the duration of their lives (based upon current actuarial tables and assuming a seven percent investment return*) beginning five years hence is approximately $3,000,000. Thus the net (after tax) sale proceeds from the sale of the business must be $2,500,000, or between $3,000,000 and $3,500,000 pre-tax.
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Tags: exit strategies, indianapolis small business, Small business exit planning
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