Year-End Review: Is Your Exit Plan on Track?
As you get to the end of the year, you are probably reviewing how the business performed and starting to think about plans for next year. If selling or transitioning the business is somewhere in your future, this is also a good time to look at whether you are actually making progress toward that goal.
Even if you have no plans to leave anytime soon, ask yourself this question: If I wanted to leave the business five years from now, would I be ready?
For many owners the answer is probably “no”. That doesn’t mean there is a problem today. It does mean there are things worth addressing while you still have time to address them.
Start With the Business
First, look at the business itself. Is revenue growing? Are margins where they should be? Is cash flow consistent? Do you have reliable financial statements? Do you have a management team that can operate the business without you being involved in every major decision?
That last question is important.
We see businesses where the owner is still responsible for most of the important customer relationships, pricing decisions, key employees and major vendor relationships. That may work very well while the owner is there. It can become an issue when someone else is evaluating the business.
If the business depends heavily on you, start working on that now. Give other people more responsibility. Develop your management team. Transfer some of the important customer and vendor relationships. Make sure someone besides you understands how and why important decisions are made.
This is good business planning regardless of when you eventually leave.
Take a Hard Look at the Financials
You should also look at your financial statements from the perspective of someone outside the company.
Would a potential buyer understand them? Are there personal expenses running through the business? Are there unusual or nonrecurring items that would need to be explained? Are related-party transactions properly documented?
These things may not seem particularly important while you own the business because you know what everything means. A buyer doesn’t have that history.
We have seen situations where the owner knows the business is more profitable than the financial statements appear because certain expenses would go away after a sale. If that is the case, those items should be identifiable and supportable. You don’t want to start reconstructing several years of financial information after a buyer begins due diligence.
Do You Know What the Business Is Worth?
This is another area where there can be a disconnect.
An owner may have a number in mind based on what another company sold for, what someone in the industry told them, or simply what they feel the business should be worth. That may or may not be close to what a buyer would pay.
You don’t necessarily need a formal valuation every year. You should have some understanding of what drives the value of your business and whether you are improving those factors.
For example, assume you believe you will need $10 million from the business to accomplish your retirement and financial goals and a reasonable estimate of the current value is $6 million. That is useful information if you expect to work another five or ten years. You now have time to determine what needs to change.
Finding out about that $4 million gap six months before you want to retire gives you very few options.
Review Who Could Eventually Take Over
If you already have a potential successor, look at whether that person is actually being prepared to take over.
In a family business, this can be particularly important. Being the owner’s son or daughter and being prepared to run the company are two different issues. The future owner also doesn’t necessarily have to be the person running the business.
If employees or other owners are possible successors there are additional questions. Are they interested? Can they run the business? How would they finance a purchase?
If an outside sale is the more likely outcome, the focus should be on whether the company would be attractive to an outside buyer and whether it can continue operating successfully after you leave.
You don’t need to decide today exactly how the business will eventually be transferred. You should understand what your realistic alternatives are.
Your Personal Financial Plan Matters Too
For many business owners, a significant amount of their net worth is tied up in the company. As a result, your personal financial plan and your business exit plan need to work together.
How much money will you actually need after you leave? What other assets and sources of income will you have? How much do you need to receive from the business? What happens if the business sells for less than expected?
The answers may affect decisions that you are making in the business today.
Also review your buy-sell agreement, estate plan, life insurance and other documents related to the ownership of the company. If they were prepared years ago, make sure they still reflect the current ownership, value of the business and what you actually want to happen.
Decide What Needs Attention Next Year
You don’t need to solve every succession issue during a year-end review.
The more useful exercise is to identify the two or three areas that need the most attention. Maybe the management team needs to be developed. Perhaps the financial reporting needs work. You may have too much revenue concentrated with one customer. Your buy-sell agreement may be ten years old. Or you may realize that you really don’t know what the business is worth.
Once you know where the gaps are, include them in next year’s planning.
If you do this every year, you can make a lot of progress over five years. More importantly, many of the changes that make a business easier to sell also make it a stronger and easier business to own today.
F+H Advisor’s Insight
If you expect the business to eventually fund a significant part of your retirement, you should know whether the business you have today can realistically accomplish that goal.
That is where we suggest starting.
At F+H, we can sit down with you and review where the business stands today, what you want to accomplish personally and the financial, tax and succession issues that could affect your eventual transition. From there, we can help identify the areas that need attention and work with your other advisors when legal, valuation, investment or estate-planning expertise is needed.
You may be five, ten or even fifteen years away from leaving the business. That gives you something very valuable: time to fix the things that could otherwise become problems later.
If you haven’t reviewed your exit plan recently, talk to your F+H advisor and make that review part of your planning for the coming year.
