4 Questions to Ask Yourself When Planning an Exit Strategy

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Sooner or later, you’ll leave your business. Asking yourself the hard questions now can save you time and stress as you exit your company later

Have the customers received their orders? Have my employees been paid? Am I getting paid this month?

These are probably just a few questions you’ve asked yourself as a business owner. As the head of your company, it’s safe to say you have many responsibilities. Too often, however, business owners get caught up in the hustle and bustle of running a company forget to plan for their future, including their exit strategy.

While you might not leave your company in the near future, you will at some point. How you choose to exit will ultimately be up to you, but in the meantime, it’s important to consider your options and proactively plan for your future. As you plan your strategy, ask yourself these questions:

1. Who will take over my business?

While you can choose to sell or liquidate your business, you can also hand over the reins to qualified successors who can run the business in your stead. In order to ensure the smoothest transition possible, you should start the succession planning process. Here are some things to keep in mind:

  • Critical positions must be filled. As you prepare to leave, you must identify who will take on your role and the roles that are fundamental to your business’s success. If these positions go unfilled, it could negatively impact the company and its growth, as well as making it much harder to sell profitably.
  • The successor and key team members must be trained. It’s not enough to just fill critical positions. Your successor and key team members must be given ample time to learn new skills and transition into new roles. Whether you choose to pass your business on to a family member or someone outside your organization, train the new leader accordingly.
  • Have a continuity plan in place. At some point in time, your business will face disruption, whether it’s a natural disaster, cyber-attack, or simply your exit from the company. Create a continuity plan to ensure your business continuously runs and is able to serve clients with the same level of quality—whether you’re present or not, and whether you still own it or not.

2.  What are my financial goals for my business?

You want to see your business succeed but gauging success can be difficult if you can’t estimate its current value. Not knowing how much your business is worth can lead to problems later on when it’s time to sell, extract value through a loan or buy/sell agreement, or transfer the business to someone else.

Enter the Value Builder System, or VBS. Created by entrepreneur and author John Warrillow, the VBS offers a straightforward approach to increasing the value of your business. Your company’s value is determined—and driven—by eight multiples. Consider these “drivers” as you plan your business exit and ask yourself these questions:

  • Financial Performance. Do I have records proving my business is creating revenue and/or is profitable?
  • Growth Potential. How likely is my business to grow when I’m not here?
  • Switzerland Structure. Is my business dependent on a particular client, supplier, or employee? Is it dependent on me as the owner?
  • Valuation Teeter Totter. How much cash does my business need to operate?
  • Recurring Revenue. How much of my revenue is expected to continue in the future?
  • Monopoly Control. Is my business different from others in my industry?
  • Customer Satisfaction. Do my customers return again and again?
  • Hub & Spoke. When I leave, will my business still run like a well-oiled machine?

Whether you plan to pass your business on to someone else (like a family member or employee) or sell it to an outside party, the VBS can increase its value and smooth the transition. Start reaching your financial goals by learning your business’s Value Builder Score.

3.  Will I be ready to retire?

You might have financial goals for your business, but that doesn’t mean you’ve considered how and when you’ll retire. According to a recent survey, nearly two in five small business owners don’t think they will be able to retire before 65.

Even if you don’t plan on retiring in the near future, the sooner you start preparing, the better. There are a variety of traditional retirement plans both you and your employees can contribute to, including a SIMPLE IRA or a SEP IRA, but perhaps your most obvious retirement asset is your business itself.

Selling a business successfully is not easy, however. Market conditions will play a big role in your ability to sell it, so be sure to build flexibility into your retirement plan. That way, you can sell your stake at the most opportune time. Other factors—your location, your lifestyle, the number of family members who depend on your support, and any passive income—will also affect your retirement plan as well.

Another important part of a successful exit strategy is estate planning. Unfortunately, unexpected events do occur. An estate plan can ensure your assets and money go to your desired family members, minimize the amount of time your assets have to go through probate, and also decrease the amount of taxes paid out at the time of your death.

4. Who will help me along the way?

Exiting your business is a big decision, and as such, you need the right professionals to guide you through the process. From developing a succession plan to retirement planning, a skilled business advisor can walk you through the process of designing a smart exit strategy—ideally, far ahead of when you plan to walk away.

Provident CPA & Business Advisors helps successful professionals, entrepreneurs, and investors get more out of their business and work less. Typically, our clients reduce their taxes by 20 percent or more and create tax-free wealth for life. Contact us for expert advice on tax planning as well as our business advisory services, and discover how we help businesses exceed expectations.

Breakups are Tough: How to End a Partnership When There’s No Formal Agreement in Place

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7 steps that can help you avoid ending up in court

Just like a marriage, no one goes into a business partnership expecting it to end. And that makes it all too easy to forget to include one of the most important elements of a partnership agreement: the exit strategy. Or even worse, to not bother setting up a formal partnership agreement at all.

Up to 70 percent of business partnerships ultimately fail – and when they do, it’s essential for the dissolution to go as smoothly as possible to avoid personal and financial headaches. Business partnerships break up for many reasons, and it often has nothing to do with bad blood between the partners. One partner may become incapacitated, for instance, or need to retire or change careers. Generally, these situations lead to uncontested departures in which the other partners understand changing circumstances and the partnership ends amicably.

But other times, things don’t go so smoothly, and the dissolution becomes contentious. Hiring a skilled attorney to create a written partnership agreement when a partnership is formed sets the stage for breakups to proceed as cleanly as possible. Most agreements outline how the partners will run the business, detailing how decisions are made, how responsibilities are divided, how disagreements will be resolved, and a dissolution strategy.

This strategy typically includes a “buy-sell” agreement that stipulates conditions surrounding a partner’s exit, including a formula for valuing privately-held shares by verifiable metrics, what situations can trigger a buyout, who is permitted to buy shares, and how quickly or slowly sales may take place.

Partnership agreements are not required by law but, at the end of the day, it’s risky to proceed without one. If there is no agreement in place, partners will need to be able to work out terms together when they want to part ways – which can be tricky if the reason the partnership is breaking up comes down to an inability to see eye-to-eye. If the partners can’t agree, mediation is often a smart strategy. Court-dictated decisions should be a final resort as they can be costly and often simply divide assets and liabilities 50-50 regardless of the reasons behind disputes.

If you find yourself needing to leave a partnership without an agreement that details how a break-up will unfold, you should ultimately consider seeking legal advice. The type of partnership and status of the departing partner will impact the final outcome, but here are seven steps that can help you execute a clean dissolution of a business partnership when there isn’t a pre-existing strategy in place.

7 steps to ending a business partnership

  1. Consult with a lawyer. It’s wise to meet with an attorney if you want to end a business partnership. An experienced business law attorney can help you understand state law and the impact of any relevant agreements, such as company bylaws or controlling documents. A word of caution: Be sure to hire your own attorney instead of using the partnership’s lawyer, whose loyalty is to the company as a whole instead of you.
  2. Consider the state of the business. Before you discuss leaving, make sure you have a firm grasp of the health of the business. Explore how much it’s worth and keep in mind that the assets and liabilities you receive if the partnership dissolves will correlate to your ownership interest. Consider what contracts, liens, mortgages, or other personal agreements you are locked into and will be held personally responsible for – even if the partnership dissolves. You can also have the partnership appraised by a business valuation service, though this will make the other partners aware that you may leave.
  3. Stay friendly. If there isn’t an agreement that spells out departure terms, it’s important to keep negotiations as amicable as possible. Partners that communicate well are much more likely to stay out of court. You may be able to agree to sell your stake in the business to an outside party or the other partners could agree to buy your shares. Again, it’s vital to consult with an attorney during this process to ensure your interests are protected.

    A “Texas shoot-out” is a common way of breaking up a deadlock over ending a partnership, essentially operating as an “I cut, you choose” method of settling disputes. Put simply, one partner elects to “cut the cake” by setting the price for the company and the other partner “chooses his slice” by deciding whether to buy out the first partner or sell his ownership at that price. But there is a caveat: while Texas shoot-outs are often proposed as an easy way to settle disputes, they can lead to abuse by the wealthiest owner, who simply sets a price the other can’t afford.

    Another option is to refrain from dissolving the partnership completely and create an agreement that changes the weighting. This typically gives one partner a majority stake and the ability to make decisions alone, and the less-committed partner an opportunity to stay involved while relinquishing some of the headaches and control.

  4. Explore mediation. If you are struggling to reach an agreement with the other partners on the terms of your departure, mediation can be a good solution. All interested parties will meet with a third-party, neutral entity, who listens to all sides and helps the partners achieve mutually acceptable terms. While mediators do charge for their services, it is almost always less expensive than getting involved in a lawsuit.
  5. Create a dissolution plan. Even if a partnership agreement is in place, you need to create a plan for dissolving the partnership. It should include:
    • A timeline that goes all the way through filing the final tax return
    • A detailed list of tasks that need to be performed
    • A schedule of payments that must be made, including who should make them
    • Documents to be filed
    • Plans for notifying stakeholders, including employees, vendors, and customers
  6. Start to separate. Once you have assessed assets and liabilities and come to terms with your partners, it’s time to start extricating yourself from the business. Simply contacting clients and telling them you’re leaving isn’t enough. Generally, you can’t erase your liability without canceling or renegotiating loans or contracts. If that can’t be done, consider setting up a company escrow account from which obligations will be paid. The partners can also sign documents personally indemnifying the departing partner, but that can quickly become complicated and requires the advice of counsel.

    An attorney should help you write a separation agreement that details exactly who owes what, so there can be no disputes or claims against you down the road. Even if the departure is uncontested, you never know what can happen if the company faces an unforeseen crisis or supersized tax bill.

    Once this is completed (and executed by all the partners), take steps to remove your name from all company documents, including loans, leases, and contracts. You also need to make sure any commitments the company makes to you are enforceable, and that you understand the steps you can take if the partnership breaches its obligations. Other important items to address in a separation agreement include mechanisms for ensuring debts from which your name can’t be removed or paid, a right to audit the company’s books if you are owed money in the future, and how your name will be removed from documents in cases where it can’t happen immediately.

  7. Dissolve the partnership. Dissolving business partnerships are governed by state law, so it’s important to get up to speed on the statutes of your particular state – especially when there is no agreement in place to detail how the separation will happen. It usually takes about 90 days to end a partnership from the time a statement of dissolution is filed. The process strives to ensure that partners won’t be held responsible for each other’s debts and liabilities and that they can’t enter into a binding transaction on behalf of the partnership.

    There are usually no tax consequences for dissolving a partnership, but you will need to account for the business-owned property that has appreciated in value and payment of business and employer taxes. You do need to inform the tax authorities that you are no longer in a partnership when you file your final return.

    Ending a partnership can feel like ending a marriage – and become just as complicated and contentious. It’s always preferable to have a partnership agreement in place that details an exit strategy. But when one doesn’t exist, a skilled business advisor can help guide you through the process.

Provident CPA & Business Advisors serves successful professionals, entrepreneurs, and investors who want to get more out of their business and work less, so they can make a positive impact in their lives and communities. Typically, our clients reduce their taxes by 20 percent or more and create tax-free wealth for life. Contact us for expert advice on tax planning, and to find out how we can help your business exceed your expectations.

When Naming a Relative as Successor, Business Comes First

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Handing the reins to a family member requires in-depth planning, skill development, and a smart tax strategy

Our previous blog highlighted how almost 12 million businesses will transition ownership in the next 15 years; a process involving $10 trillion worth of assets. And family-owned businesses make up a significant portion of organizations that will be changing hands.

SCORE research on family-owned businesses shows they’re crucial to the U.S. economy. They generate 64 percent of the gross domestic product, employ 60 percent of the workforce, and are responsible for 78 percent of new jobs.

Selecting a relative to inherit the business can be a comforting choice. There’s a lot of trusts and good faith in place—but those same benefits can impede a clear focus on four core succession steps.

Have a succession plan

The most important insight in the SCORE research was this: only 30 percent of family businesses survive the transition from first to second generation ownership, and only 12 percent make it through the second to third generation change. If a business infrastructure is in place and there’s a pre-existing relationship between both parties, why does this failure rate exist? The answer is that almost half of owners don’t have a succession plan.

The Value Builder System pioneered by John Warrilow is an excellent approach to setting one up. It’s designed to make a business attractive to an outside buyer while proving it can perform smoothly during and after a transition.

The principles of the VBS apply equally well to family succession since they make owners take a hard look at every aspect of their organization, from customer relations to how much freedom a new boss can enjoy. Every change in ownership should be treated with the same meticulous attention, regardless of if the next boss is a family member or an outside entrepreneur. Planning family succession as you would impressing an outside buyer will set the business up for continued success.

Explain the plan to key parties

The definition of a key party will vary between owners, but it’s best to treat nearly every member of the staff as such. Obviously, the successor and any executives or shareholders are key. There may be a price to pay, however, for not making all employees fully aware of what transition means for them.

There’s a “right time” to inform everyone. Senior staff should know from the outset, while anyone further down the chain should be informed once all aspects of the transition are finalized. Early knowledge of a transition makes people feel vulnerable; unsure of the company’s future and the security of their jobs. And not clearly explaining the transition too late can have a similarly disruptive impact.

This uncertainty can hurt a business during a changeover through impaired performance or even losing staff. Your successor is family, but they may also have their own way of running things. Give everyone clear information on what a transition means for their individual role. This transparency will benefit the new boss since every employee will know where they stand and can act accordingly.

Develop the skills of the successor

Small increases in your successor’s current responsibilities are a good way to ease them into taking on more. Crafting a schedule of achievement dates and milestones is a proven method to gradually boost their skill set on the way to assuming full control. Don’t be afraid to constructively point out any areas where their skills could be stronger.

Let them accompany you to meetings with staff and customers to forge new bonds and participate in all aspects. The more a successor learns to see things from the point of view of fellow team members and your target market, the more prepared they will be.

Owners should not only expect but embrace the fact that their successor is an individual and not a “second self.” Improve their skills but don’t impose every aspect of how you do things; training should augment their talents, not stifle their growth.

Understand how smart tax strategy impacts family succession

Family members may choose to sell aspects of a business to each other at a lower price than to strangers. In some cases, they may gift the stake entirely. U.S. business owners can gift as much as $5.43 million in assets over a lifetime before capital gains taxes are necessary. This figure increases based on how many family members own the company; for example, a couple counts twice for a total of $10.86 million before capital gains taxes kick in.

Consider a business worth $5 million that was first purchased at $500,000. The cost base is $5million and the successor will owe tax starting at that amount if the business is sold to them. If it’s gifted, the tax would start at the original cost base of $500,000 when they choose to sell. Keep in mind: if the businesses thrives and achieves much greater worth, your child will owe quite a bit of taxes upon a sale.

For more information on operating a family business, visit FamilyBusiness.org. For succession planning and tax advice, get in touch with us at the link below.

Provident CPA & Business Advisors helps successful professionals, entrepreneurs, and investors get more out of their business and work less. Typically, our clients reduce their taxes by 20 percent or more and create tax-free wealth for life. Contact us for expert advice on tax planning and discover how we help businesses exceed expectations.

Business Exit Planning Using the Value Builder System

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100 percent of people eventually leave their business. A good exit strategy allows owners to turn a good thing into a better one by protecting assets, building value, and striking the best deal

Entrepreneurs want their business to grow and thrive, and an increasing number also want to sell. Last year saw a record number of businesses sold as a booming market for owners and buyers took shape. Almost 12 million businesses will transition ownership in the next 15 years, representing $10 trillion worth of assets changing hands.

Nevertheless, further data shows that too many owners are far from prepared for their exit:

  • 48 percent of businesses don’t have an exit strategy
  • 58 percent have never undergone a formal business appraisal
  • 75 percent of business owners believe they can sell-up successfully in under a year

These figures don’t go well with the 82 percent of owners who’d rather make money from selling a business than keeping it. Those who want to capitalize successfully cannot do so without a well-structured exit strategy. Even if you don’t plan to sell or transition out in the near future, you’ll eventually need a plan, no matter the size of your operation. And it pays to start planning ahead of time.

Succession and continuity planning

Many exit strategies don’t involve a buyer from the open market. Instead, owners often choose a successor from within. This guide provides the steps for a solid succession plan; a strategy which involves mentoring your successor and setting a clear timetable of their responsibilities and all future transition dates. There are a couple of key considerations when choosing to go this route:

  • Ensuring that you have the right relationships in place is essential. You may have the most power in a business you own, but your exit can be vastly smoothed or shaken by those around you. Many once-harmonious business partners will attest to the fact that acrimonious splits can be a nightmare. Any issues can be avoided (or at least mitigated) by drafting your exit strategy proactively, while key parties are on good terms. It will clarify buy/sell agreements and the best exit strategies will let every employee know that a change of ownership is coming and what it means for them.
  • Be sure to factor successful estate planning and retirement into your exit strategy. Your business may have multiple owners and if so, a cross-purchase agreement will smooth succession, assist in retirement, and guard against unforeseen events.

The Value Builder System: a key to ROI

If you plan to sell your company to an insider or an outside buyer, you want to make it as valuable as possible. The Value Builder System (VBS) is the brainchild of John Warrilow, author of the highly rated Built to Sell: Creating a Business that can Thrive Without You. The VBS makes things simple if you’re looking to attract buyers: to increase the value of your business, you must increase either your profit or your multiple.

Your multiple is driven by 8 factors:

  • Financial performance: Recording your top line revenue and your bottom-line profit is a priority for any exit strategy. Consider investing in an audit so you’re better able to present your business numbers reliably.
  • Growth potential: Your past successes are great, but buyers are purchasing tomorrow, not yesterday. They want to invest in your future profit stream. Can you show them anyways your business can significantly scale up?
  • The Switzerland Structure: Just like the famously neutral country in question, your business should not be overly dependent on any one faction—not customers, not employees, not suppliers. You’ll be considered more of a risk if buyers see you’re too reliant on a single source.
  • Valuation Teeter-Totter: Anyone buying your business essentially writes two checks—one to you, and the other to fund your business’s working capital. The more money it costs to run, the less likely it is to sell. Your operation must be generating enough cash to balance things out.
  • Recurring revenue: There are six types of recurring revenue: consumables (like coffee), sunk money consumables (espresso machines will need capsules regularly), subscription revenue (like magazines, this is a reoccurring revenue for a specified time into the future), sunk money subscriptions, auto-renewal (a subscription in perpetuity), and contract revenue (where a customer is obligated to buy from you in the future).
  • Monopoly control: This means you have control over the pricing of your product; you’re not a commodity. Your business should be in a differentiated position which makes you unique in the marketplace. This empowers you (and whomever inherits your business) to stand out and connect more effectively with customers.
  • Customer satisfaction: This is directly linked to the growth potential for prospective buyers. Can you empirically quantify and demonstrate customer satisfaction to a buyer? The more data you can show that proves your customers are happy and likely to keep buying, the more impressive you’ll be to anyone looking to acquire the business.
  • Hub and Spoke: How much freedom do you enjoy as the current owner of your business? It’s not an attractive sell if your entire life is consumed by its operation. A company that can flourish even in the absence of the boss is much more likely to close a deal. Document, distribute, and drive home your business practices so all your employees intrinsically know their roles and responsibilities. They’ll be more likely to run a smooth ship whether you’re on deck or not.

A smart, comprehensive exit strategy should be put in place early to make sure you maximize the ROI from the sale of your business. If you’d like expert advice on how to exit plan ahead and sell a business tax efficiently, contact us below.

Provident CPA & Business Advisors helps successful professionals, entrepreneurs, and investors get more out of their business and work less. Typically, our clients reduce their taxes by 20 percent or more and create tax-free wealth for life. Contact us for expert advice on tax planning and discover how we help businesses exceed expectations.