What is an Exit Plan?

Exit planning is the buzzword for those who consult to Baby Boomer business owners. Business brokers, wealth managers and other professionals are adding “exit planning” to their services. It’s a logical reaction when over 5,000,000 Baby Boomers (about 3,000,000 in 2024) are preparing to leave their businesses.

Not surprisingly, when an advisor creates an “exit plan,” it usually involves listing the business for sale to a third party. An attorney’s planning focuses on the legal documents that allow the transition of the assets of a company to new ownership. An accountant or will look closely at tax issues and wealth manager focuses on coordinating the legal, tax, insurance, investment, cashflow and inheritance issues.

Why do an Exit Plan?

Before drafting the first document or embarking on a plan to spend the money from a sale, the business must first realize the proceeds of a transaction. That means it must find a buyer who will pay for it. That buyer could be a third party, but it might also be an employee, an employee group, or family members.

Any third party considering the purchase of a business will do extensive due diligence. Their willingness to pay a premium for a company will depend on its track record of revenue growth, the stability of its margins, and how well-established its systems and customers are. If the company is larger than about twenty employees, they will look for supervisory and management talent who will stay after the sale.

Regardless of size, a business that is highly dependent on the owner for revenue or making all key decisions will be deeply discounted or even impossible to sell. An exit plan should look at these factors and help to make the adjustments needed to realize full value.

Selling to employees or family is often an attractive option because it allows the owner to choose a retirement date, and price is less of an issue than financing terms. Unless you are willing to accept a promissory note for most of the price and feel secure that your successors can maintain payments over a long period, a plan for this kind of exit should begin at least three, and preferably five to eight years before the planned transfer date.

What is an Exit Planner?

An exit plan needs legal, tax, risk and wealth management expertise to be successful, but it also requires a practical examination of the operational strengths of your business. Selecting one professional to manage the efforts of everyone, and to help keep you on track, is a wise investment.

In the US, the average small business owner has nearly 75% of his or her net worth tied up in the company (still true in 2024). The single biggest financial transaction of your life deserves special attention.