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Joan M. Ridley
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But I’m Not Ready to Leave My Business

By

Joan M. Gruber Ridley, CFP™, CEPA®

Of course you aren’t. Business is great. Cash flow is excellent. Prospective acquirers with lots of money are everywhere and you believe they’re willing to pay top dollar. Why even consider exiting now if you can exit for top dollar any time you wish? Perhaps you don’t even know what you would do if you left your business. In fact, maybe even the word “exit” makes you feel uncomfortable.

The Confusion: Exit Versus Exit Planning

In the next few years you will be hearing a great deal about exit planning, or Comprehensive Corporate Transition Planning as we prefer to call it, as 4 million baby boomers attempt to leave their businesses. They will encounter fierce competition for the most attractive acquirers, especially as the current market cycle begins to decline. According to Michael Hecht, analyst with Banc of America Securities, mergers and acquisitions cycles typically last for six to seven years. He estimates that two to three years remain in this current boom cycle which began in 2004. While many baby boomers are not ready to exit now, this would be a good time to start planning for that event. As you can see, Comprehensive Corporate Transition Planning and business exit are two very different things.

The Differences Between Comprehensive Corporate Transition Planning and Business Exit

Business Exit: It’s an Event

Time Frame: Imminent. Begins immediately & typically takes 6-18 months
Purpose: To change ownership of the business
Result: The transition has a 50% chance of success
Opportunity to increase value: Minimal once business is in play
Benefits: Allows owner to leave business quickly, as-is
Draw-Back: Owner could sell for less than business is worth, pay more in tax, and learn about a more advantageous strategy after the sale

Comprehensive Corporate Transition Planning: It’s a Process

Time Frame: Can begin any time but takes 2-5 years to complete the process
Purpose: To prepare the business owner and the business for eventual and successful change of ownership of the business (to family, employees, or third party) and achievement of owner’s personal goals
Result: The transition event has a 95% chance of success. Historically, a third party sale has resulted in a minimum of a 27% higher sale price.
Opportunity to increase value: Value is created during planning process
Benefits: Owner is in control of eventual corporate transition; business is positioned to achieve owner’s goals; owner can decide not to leave the business; owner can change stated exit strategy such as from family or employee succession to a third party sale; reduces business risk; preserves family wealth; reduces family and employee uncertainty; usually results in positive changes such as in profitability, value, and operations efficiency even if owner decides not to exit

The Ultimate Trip

Think of leaving your business as taking a trip. Hopefully you would do some planning beforehand. You would need to explore: where to go; how long you will be gone; how to get there (car, boat, train, and plane); the condition of your car if yours will be a road trip;

the cost and possibly the exchange rates; what sites to visit at your destination; what advance reservations need to be made; and what gear or clothing to pack.

Before departing you would probably secure your home, provide for loved ones and pets in your absence, and create a plan in the event of an emergency. If the trip was to an exotic or unfamiliar destination, you might even engage a travel agent or tour guide. You certainly have more at stake when leaving your business and the planning process is far more complicated, and yet, most business owners will give more thought to planning a vacation.

Length of Trip is Your Choice

While most business owners think of a business exit as an event that occurs all at once, that is not always the case. It can take place gradually, such as over a period of two to five years. It can occur suddenly, but even then the owner might remain with the business under an employment contract for a period of sixmonths or more. This is especially true if the owner’s expertise or relationship with customers is significant. The exit can involve transfer of a majority interest, typically 80%, where ownership ends up with 20% of the enterprise. This would allow him or her to participate in the post-exit upside. Or, the owner can transfer 100% of the assets or stock with no contractual agreement to remain after the transfer. If you participate in Comprehensive Corporate Transition Planning, you are more likely to have all of these options available as you begin to execute an exit strategy.

Value of a Good Travel Agent

Whether you hope to leave your business partially, totally, gradually, or suddenly, you will need to plan for the event if your goal is to leave your business successfully. According to the Exit Planning Institute, business owners who engage in the Comprehensive Corporate Transition Planning process receive 27% or more for their business, the transition success rate increases from 55% to 95%, and the fees incurred to achieve this are about one- third to one-sixth the increased transaction amount.

Where to Start

The Comprehensive Corporate Transition Planning is complicated and requires oversight of one professional who is responsible for identifying, prioritizing, and integrating all the facets of the process. A Certified Exit Planning Advisor, CEPA®, has a professional designation conferred by the Exit Planning Institute on experienced professionals who are qualified to offer this service. The process addresses the business, personal, legal, insurance, wealth management, and tax questions that you will encounter throughout the corporate transition journey. The goal is to minimize taxes, maximize enterprise value, and insure that you will be able to accomplish all of your personal and financial goals. According to the PriceWaterhouseCoopers Study “Whose Business is it Anyway”, failure to do presale planning is the number one reason why deals fail. Take the first step today to insure that you leave your business on your terms by contacting a Certified Exit Planning Advisor ®.

 

Joan M. Ridley is president of Business Wealth Solutions, a Dallas-based advisory firm that consults with business owners about how to successfully grow and leave their business. Visit our website at www.bwsllc.net. Call us today at 214.692.9192 for a complimentary meeting to learn how we can help you get where you want to go.

Copyright 2007 Joan M. Ridley

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