Editor’s Note: This is the first of a two-part series. The remainder of this commentary will appear in the July 25 issue of The NEWS.
In running a contracting business, there is only one guarantee: the owner eventually will exit — either voluntarily or involuntarily. The day will come when he or she will say goodbye.
Exiting is not an easy process, and the odds are not in an owner’s favor. Therefore, in order to succeed, the business and the owner must both be prepared to successfully transfer the business.
This article will address the common confusion found in differentiating a business exit from a business succession. Both are needed to successfully exit a business, unlock trapped wealth, protect one’s legacy, and successfully move the company into the next generation or to an external buyer.
My experience has reaffirmed that business owners cannot commit to the difficult emotional succession process (replacing themselves) until they can clearly envision their financial futures (exit plans and retirement) and accept the reality that they will not outlive their money.
An exit plan is a necessary tool that will assist the business owner in controlling and visualizing the process of transferring and monetizing their business while getting a better understanding for the financial aspects of the transaction. Since approximately 70 percent of a business owner’s wealth is trapped inside the illiquid business, this should become a top priority.
This is a risky process. Several studies have concluded that fewer than 30 percent of businesses will actually transfer or sell to employees, managers, or family, ending in liquidation or 10 percent of the business value, for the owner. Further, when selling to an outsider, fewer than 20 percent of the companies that are brought to market actually close.
And, if an owner is fortunate enough to sell or transfer, he or she can be sure Uncle Sam will be waiting for his “fair share,” which can fleece as much as 55 percent of the harvest. Ouch.
In the simplest terms:
An exit plan focuses on monetizing the business’s trapped illiquid wealth without being clobbered by taxes (which can consume more than 65 percent) and not running out of money in retirement.
A succession plan focuses on the company successfully performing without the present owner by moving management into leadership, ownership, and eventually replacing the empty CEO’s chair.
An exit plan provides a customized written plan that monetizes the business, meets the owner’s personal and financial goals, protects his or her wealth, and moves the owner into his or her next stage of life.
A succession plan provides a customized written plan that focuses on the human side of the business. Succession replaces the owner by moving the chosen performers to the next level of professional management: into leadership, ownership, and the position of CEO. This requires time, training, facing blind spots, and stretching the team.
An exit plan helps secure the owner’s business wealth and sets the stage to move into succession. The plan establishes and controls the process of who, what, when, and how to control this course of action while protecting ones’s wealth.
The exit can be complex and taxing on a financial and emotional level. One cannot spend 30-40 years of his or her life building a business without a strong attachment. Business is not just what an individual does, but who that individual is.
This complex process requires specialized advice from an accountant, business appraiser, tax advisor, corporate attorney, estate planner, financial advisor, and insurance advisor, among others.
The exit is also very taxing from a financial perspective, where one can surrender more than 55 percent of his or her harvest to taxes on the state and federal levels. An exit plan addresses the:
1. Coordination of one’s options in concert with his or her personal, financial, and business goals;
2. Legal exit vehicles (i.e., sale, private equity, ESOP, management buy-out, gifting). Note: Most contracting companies exit via a management buy-out;
3. Number needed from the company to meet the owner’s retirement needs and not outlive his or her income;
4. Financial and strategic considerations of one’s exit vehicles;
5. Asset protection from creditor and predators;
6. Options to meet financial and exit goals; and
7. A customized plan that includes the tax strategy, buy-sell agreement, estate plan, income replacement, legal agreements, and retirement plan that protects the owner’s wealth.
Other benefits of an exit plan are to:
• Maximize business value;
• Leave an “intentional” legacy;
• Handcuff key players;
• Minimize or eliminate taxes;
• Control how and when you leave;
• Create a written plan to follow and measure; and
• Protect employee succession and harmony.
In the second part of this series, scheduled to run July 25, I’ll examine succession plans and how they differ from exit plans. In the meantime, if you have any questions, contact me at any time.
Publication date: 7/4/2016