Exit Planning

Family Business Institute

Family Business Experts is the Internet organization for the Atlanta-based Family Business Institute. Don Schwerzler, who has been working as a family business advisor for nearly 40 years, founded the Family Business Institute as a specialized resource for families in business together. Family Business Experts, the highest-ranked family business resource on the Internet, contains tips and success strategies for family business, and can be found here.

When is the best time to start the exit planning process? The answer is immediately—preferably when you buy or launch your business. Exit planning is essential because no matter what, someday you will transfer your business interest—either because you choose to or because you die or become incapacitated.

Without exit planning, your business will probably have to be liquidated someday. Liquidation under forced circumstances is a chaotic process that results in "fire-sale" prices.

Four Ways to Transfer Business

Even with an exit plan, there are only four ways to transfer your business interest:

1. Transfer ownership to your children

2. Sell to other owners or employees

3. Sell to a third party

4. Liquidate in an orderly way

The key is to pick the approach that's best for you and then assemble a team of advisors to help develop and implement the exit strategy. Trying to go it alone can prove expensive—even catastrophic. For most business owners, this is a once-in-a-life-time event and it needs to be done right.

For family-owned businesses, we recommend hiring an experienced family business expert to act as the quarterback for the exit planning process. Among the many things family business experts can do is sort out priorities so professional services do not get duplicated. They can also help resolve differences within the family that could stall the exit plan, such as how to be fair and equal to all your children—an especially difficult problem when some children work in the business while others do not. The family business expert you select should be skilled in business development, as well.

Make Exit Strategy Part of Business Plan

We estimate that most family businesses need to increase their growth/profits by at least 15% to cover the cost of transition during the exit process. That estimate does not include the time the business owner must commit to the exit planning process—time away from running the business.

An exit strategy should be a part of your business plan from the beginning because it affects key decisions about how you grow the business. The business plan and exit strategy must be compatible with your personal goals for income, flexibility, family, retirement, and so on. Exit planning involves complex issues such as wealth preservation, contingency planning, and income tax, estate, and gifting regulations. K nowing your goals and being able to effectively communicate them to members of your family and to your professional service providers is crucial to keeping the business healthy and robust— and avoiding family feuds.

Professional Valuation an Important Step

A critical element of any exit strategy is a valuation of the business by an experienced valuation company. A skilled valuation expert can make sure the professional advisors assisting you (investment and insurance experts, certified public accountants, estate/business/tax attorneys) have the right information to develop and implement a successful exit strategy, including how to improve key business ratios that influence the value of your business. Improving these ratios should be incorporated into the short-term goals and objectives of the business and worked on concurrently during the exit planning process.

Owners often think they know the value of their business, and thus may be tempted to forego hiring an expert, but in reality they may be shockingly misinformed. In 2001 SPARDATA, a leading national business appraisal firm, surveyed thousands of business owners and concluded most misjudged the value of their businesses by 50% or more—sometimes by millions of dollars. So be sure your business is properly appraised before developing your exit plan.

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Family Business Experts is the Internet organization for the Atlanta-based Family Business Institute. Don Schwerzler, who has been working as a family business advisor for nearly 40 years, founded the Family Business Institute as a specialized resource for families in business together. Family Business Experts, the highest-ranked family business resource on the Internet, contains tips and success strategies for family business, and can be found here.