Why Every Business Owner Should Have an Exit Plan

When many business owners hear the words “exit plan” or “succession plan,” they immediately think of retirement or that the end is approaching. Some owners view exit planning as “nice to have” while others quite frankly are just too busy managing their company to develop a plan with their advisors and put it in place. But having the right plan in place can reduce risk and ensure that those you care about are taken care of if the unexpected happens.

A Difficult Topic for Many Business Owners

Because many business owners have been involved with their company for years, they see it as the realization of a life of hard work and sacrifice. That can make it difficult to consider relinquishing some or all control of the business—or even consider retiring.

It’s not that business owners aren’t aware of the value of planning. According to research from the Exit Planning Institute, most owners believe it’s important to have a transition strategy. But 49% haven’t done any planning and 83% don’t have a written plan. Two-thirds don’t know all their options. This could put them and their businesses at risk if the unexpected happens: 50% of business exits result from one of the five “Ds”—death, divorce, disability, disagreement, and distress.

On average, 80% of a business owner’s total wealth is tied up in the business, so the risk of not having a solid exit plan seems too costly to ignore. But what makes a sound, effective exit plan?

A Living Document—and Guidepost

Business owners are conditioned to adapt to dynamic and changing environments. That principle applies to exit planning, too. A plan isn’t something to be filled out, put in a safe, and revisited every couple of years. It’s meant to be a living document that a business works toward every day.

Plans should be flexible enough to adapt to changes in your goals, the goals of your business, and evolving market environments. In other words, an exit plan should be your guidepost to ensure that all your decisions, whether strategic or day-to-day, align with your personal and financial goals.

What an Effective Exit Plan Should Do

Exit plans are clearly tailored to each business owners’ financial and life situation, because no two owned businesses are alike. But every sound exit plan should be designed to provide the following benefits to business owners:

  • Help you control when and how you exit. Gaining control over the timing and method of exiting a business is critical. This includes unsolicited offers, which often take owners by surprise.

  • Maximize value. No one can control the market and prevailing multiples for selling a business, but you can maximize where your business falls within the range of possible multiples.

  • Minimize taxes. By understanding different exit options, including how a business sale can be structured, you may be able to reduce income and future estate taxes.

  • Clarify your transition choices. The path to transitioning a business to management or your family may be different than transitioning to a third party.

  • Make you more financially prepared. Exit planning isn’t just about the business—it’s also about how sales proceeds could impact your wealth, legacy, and ability to achieve your personal financial goals.

Taking a Multigenerational View

Only 30% of business are successfully transitioned to the second generation and only 12% make it to the third generation.* Incorporating the next generation into your exit plan requires more than simply transferring financial wealth.

It’s critical to make sure your heirs are prepared for continued success, so your wealth can last. Do your heirs fully understand your values, vision and philanthropic legacy? Are they ready to be good stewards of capital? If they’ll still be involved in the business, do they have the leadership skills? Are expectations clear? Are employment rules for the family in place?

These are just a few of the considerations when developing a plan. Many business owners spend years building and running successful businesses. Sound, multigenerational planning is essential to ensure that success is passed on.

The First Step: Assembling an Exit-Planning Team

As with most plans, the best starting point is surrounding yourself with the right team of advisors and making sure everyone is on the same page. The composition of teams may differ somewhat depending on the type of business, but consider starting with the following experts:

  • Accountant

  • Investment banker/M&A advisor

  • Corporate attorney

  • Trust and estate attorney

  • Wealth planning/investment advisor

Once the team is in place, they can help you address the key components of your exit plan and navigate the complexities and financial implications of transitioning your business. Just as important, you can work through plans for your own next phase—how you’ll spend your time once you’re free from the day-to-day demands of running your business—and the capital you’ll need.

Exiting a business can be a daunting and complex process, but with the right plan and team in place, you can help ensure that the transition happens smoothly and efficiently. Ultimately, your exit plan should help you get the most out of your business while you own it—or when you decide to sell or transition it.

*Exit Planning Institute

Business owners deserve a partner who will support them right from the start. For more thought leadership for entrepreneurs and business owners, check out the related blogs here.

Authors
Andrew Bishop
Associate Director—Wealth Strategies Group
Daniel Brunello
Director—Wealth Strategies Group

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.

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