Be Prepared or Be Scared: The Need for Proactive Exit Planning

John Kielich, CPA, CVA, Managing Director of M&A Advisers   email | bio
April 2009

It would be an understatement to say that the current economic climate has shocked a majority of businesses and business owners. A great 2009 for most businesses will be one on par with 2008. While some companies will experience real growth in sales and profits, this will be a rare exception. For business owners who had planned to sell or transfer their businesses, a new reality has set in.

Your Most Valuable Asset

As a business owner, your most valuable asset may well be your company. When was the last time you considered its long-term prospects? For your personal finances, you most likely insist on meeting regularly with your financial adviser to review your investment portfolio and to discuss diversifying and adjusting it. Do you seek the same outside advice on your business?

Best practices suggest that a business owner, five to ten years prior to retirement, should meet with a cadre of experts in tax and estate law to create the owner’s exit plan. The goal of this plan is to pass on or create enough wealth to sustain your desired lifestyle.

During plan development, you will determine the date of your retirement or sale of the company as well as the amount of money you need to support your desired lifestyle. In addition, this group will advise on tax-efficient ways to pass on the wealth gained from the transition or to monetize the investment in the company at the prescribed time.

Until retirement, you will meet with these experts to implement and monitor your plan as law or family situations change. In addition, you will need to continuously evaluate the health of your business. Below are some things you should consider in this evaluation process.

Determining Value

A review of the company’s value drivers is a more accurate tool for determining future value than a traditional valuation. A valuation assigns a dollar value to a business at a specific point in time. Reviewing the value drivers of the business will provide an assessment of its ability to create value over the longer term. It can also alert you to the risks that exist in your current business model. This review should consider market, critical success and company-level factors including the following items.

• Market factors include markets, customers, suppliers and end-users of the business as well as the economies that affect each.
• Critical success factors include technology, barriers to entry, and current and future competition.
• Company-level factors include cost structure, human capital and processes.

When and how should I start evaluating my company?

Any business owner who has an exit plan or is currently developing one should start this review process now and repeat it regularly. You do not need to do this review on your own. Consider having an adviser help in this process. A third party will provide an unbiased review and, much like the doctor, tell you things you might not want to hear but should.

The Benefits

 The results of this review will be invaluable and can aid decision making and planning. For example, identifying that a business’s markets and customers were primarily concentrated in the home building industry would have been critical information as the financial and housing markets started to melt. By performing a review, the business owner has the information necessary to make decisions about what course to take or when to sell.

Regularly reviewing the health of your most important asset needs to be a priority and should be part of your proactive exit planning process.

If you have questions, please contact John Kielich (262/754-9400) .