There are many independent businesses in the US. The Census Bureau estimated in 2016 that there were about 7.7 million establishments across the country where at least one paid employee worked. But with more than 32.5 million businesses in the United States, it turns out those offices, stores, and factories are in the minority when it comes to where people conduct business. The far bigger share is the percentage of those so-called “nonemployer” businesses in the country. It’s about 25 million businesses or 76.2%. That includes sole proprietors who set up shop in their home or at a shared office space but also includes people who work as independent contractors, consultants, or freelancers for larger businesses.
Whether you have one or one hundred employees, your business is a huge part of your life and running it can be challenging. In fact, most business owners consider getting the day-to-day and year-to-year tasks done a small victory. Making profits in the industry involves eventually showing a good cash flow and a bottom-line profit. In this kind of thinking, entrepreneurs also find out that, at some stage in the future, they will build and execute their exit strategies. Sadly, not all have this chance. The key is to build a business that someone will want to buy, which means it is financeable.
It is a fact that none of us can anticipate the future, but having a strategy in place that foresees future developments and situations can help one gain economic gains that are expected to occur in the future. This rule applies to the sale of businesses. If the owner of the company has an escape plan in motion, opportunities might not be overlooked as easily as they could without a plan. The exit plan is intended as a tool to get the owner to think about the future and serve as a guide once arriving at the point of exiting. This is why having a written exit plan is always important to have.
What’s in it for Business Owners?
It’s always beneficial to be proactive in business, especially now! Do you remember the time you saw an item on sale for a large amount off and you did not buy it only to realize a month later you should have made the purchase? Alternatively, did you ever buy an asset that was more valuable to a purchaser a month or a year ago than it is today (i.e. securities, commodities, or real estate)? Many of them can contribute to circumstances like this. If either the buyer or seller should have expected the scenario, today they would be better off economically.
There are different types of exit strategies to pick from. Many business start-ups set their targets with an initial public offering. Although this is a respectable and worthy objective, it is unlikely to happen to any of us. The majority of exits from the business include the purchase or selling of a business. It is crucial to have a realistic target when designing an exit strategy. However, this does not mean that does not mean an IPO is unreasonable for everyone, but the business owner should think about possible alternatives to their primary goal or their intended exit.
Here is a discussion of the various types of business exits or selling agreements that can be made:
1) Sale of a Business – A business is sold to an individual, group of individuals, or an entity. Doing this, the business owner receives cash or an equivalent for the business. However, it can be difficult to find a ready, willing, and able buyer to purchase the business.
2) Acquisition – Similar to the “Sale of a Business” exit, but usually involves an outright purchase of another company. You receive cash right away, but you must find a ready, willing, and able buyer that wants to acquire your business and add to their business.
3) Merger – In this type of exit, the business joins with an existing company. As with a sale of a business, you get cash, stock, or a cash equivalent, but you join in with new partners and may suffer a partial or complete loss of control of your business. A Buy-Sell Agreement is used for the future exit strategy
Steps Toward a Smooth Exit
1. Getting Started
Since we cannot predict the future, it is necessary for the business owner to follow a “what if” attitude when thinking about exit plans. It’s a really clear logic. To pursue this, ask “What if” or “What should I do if” and then name or state a scenario. Examples: What do I do if my company is expanding rapidly in the next five years? What happens if the country hits a depression? If the type of wording of the thought is not relevant, this sort of thinking helps the business owner to cover a wide variety of contingencies and to plan accordingly.
While it can be helpful to list multiple contingencies, you cannot prepare for every possibility that occurs. It is more important to pick the most important scenarios from the several anticipated possibilities. Establish a document detailing the actions and procedures to be implemented in the case of any contingency arising.
Each exit strategy should take into account various considerations, such as market, competitiveness, owner’s capital & priorities, and any other related intangibles. Also, the right plan takes into account the objectives of all involved people.
2. The Homework
The homework consists of reviewing any existing agreements you have with partners, shareholders, and others who are involved in the organization. The agreement may consist of articles of incorporation, by-laws, and buy/sell agreements. The exit plan must conform to the existing agreements or it could defeat the plan. If you don’t have any existing agreements between shareholders and partners, now may be the best time to create one in conformity with the plan you want to follow.
Important Note: A buy/sell agreement is the most significant legal document a business can have that encompasses exit strategies.
3. Shaping The Plan
The remainder of the outline should be completed after the homework has been finished. The strategy does not actually have to be complex or even well written in order to be successful as scenarios occur. The most effective strategies are those that are most carefully thought out, so it pays to consider at this point.
The Goal – It is important to define a goal. Obviously, the main goal in any exit plan is to achieve the best results. These results may include reviewing the biggest monetary gain, the smoothest transition into the next generation, paying the least taxes, or to create a retirement plan.
The People – Next it is important to choose the players to be involved in the exit plan. Decide what partners or key people will handle what or what you would like them to do. When the time comes, the people named may not be willing to do the task, so be wary of this situation and always keep your plan up to date and current.
The Business Valuation – Valuation of the company is also important. It is important to identify a company or professional that has expertise in this specialized area. A poor valuation by a business broker can lead to selling the business for a price short of what it should be. An entire lifetime of hard work and sacrifice should not be devalued by means of a shoddy valuation; it would not be fair to you or those around you. Valuation of a company should take place every year because the results and value-added drivers of operation are important to the overall value of the business.
Due Diligence – Potential due diligence issues then need to be addressed. Due diligence is the process of ensuring the accuracy and completeness of assertions. It is best to address the issues now rather than wait until the exit. Items such as obsolete inventory, family members on the payroll, and real estate all need to be dealt with and thought of before the business is put it for sale. An issue in due diligence can result in a deal-breaker when your exit plan is put in action.
Being proactive in business pays, especially pays when you are dealing with an exit strategy. Dealing with the issues that come up now can eliminate lost opportunity, headaches, and problems that may not be able to be solved when the exit occurs. Therefore, it is important to have an exit plan at all stages of a business. If you like, please contact the professionals at the Center for further assistance in your business and tax needs. The professionals at the Center specialize in exit strategies for private companies. Financial, legal, and tax advice is provided in developing exit strategies.
Author’s Note: “I have worked with Bart Basi on transactions for over ten years and I wanted to share his latest article.” – Chris Curtin
Bart A. Basi
Dr. Bart A. Basi is an expert on closely held enterprises. He is an attorney, a Certified Public Accountant, and the Senior Advisor of the Center for Financial, Legal & Tax Planning, Inc. He is a member of the American Bar Association’s Tax Committees on Closely-Held Businesses and Business Planning.
Marcus S. Renwick
Marcus Renwick is an attorney and the Director of Research and Publications with the firm