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Clark Schaefer Hackett | Crucial Strategies for a Smooth Exit

Michigan Business Network
October 19, 2021 3:00 PM

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The Perfect Exit Strategies for Business Owners

Every business owner eventually faces the question of when to retire, and whether to sell the company or leave it in the hands of family members. The key to making these large business transitions seamless is to craft an exit strategy in advance that addresses the needs of not only the departing owner but also the business. Learn how in this article. 

At some point in time, every business owner will retire and either sell their ownership interest or leave the company to others. The key to a seamless transfer is to identify an exit strategy that addresses the needs of not only the departing owner but also the business.

Map the course

A well-planned exit strategy can help owners extract cash from their businesses, addressing a variety of transfer scenarios. These may include voluntary transfers such as retirement, gifts to family members, donations to charities, stock compensation plans for managers, or mergers or acquisitions. They may also include involuntary transfers such as death or disability, divorce, partner/shareholder disputes, bankruptcy or restructuring, or natural disasters.

Business owners often overlook the possibility of unexpected events. But, as you know, operating a business without a contingency plan is like driving blindfolded: Things are fine as long as the road is straight and predictable. But when conditions change, a business owner can often run into trouble.

Keep it real

The optimal exit strategy depends on the transfer scenario along with the owner’s personal needs and objectives. Exit planning starts with number crunching but should also include some soul searching. Beyond the numbers, what else does an owner hope to achieve when he or she leaves the company?
Many owners dream of having their children run the show after they leave. But, in reality, their children may be incapable of managing the company — or uninterested in taking the reins. In any event, it’s in the owner’s best interest to maintain control until a viable and workable plan can be executed.

Understand their options

Once goals are set, the owner needs to evaluate which alternatives meet their short- and long-term needs. Some of the most common exit strategies for private businesses include:

•    Buy-sell agreements, which can provide liquidity upon the owner’s retirement or an unexpected “triggering” event (such as death),
•    Gifts and inheritances, which work well for owners seeking to transfer ownership to relatives or a worthy charity,
•    Related-party sales to employees via an employee stock ownership plan (ESOP) or to other potential buyers such as suppliers, customers, and competitors,
•    Mergers or acquisitions with unrelated buyers, and
•    Public offerings.

When it comes time for your clients to weigh exit strategy alternatives, work with a qualified business valuation expert. He or she can appraise assets for gift and estate tax returns, provide insight into buy-sell provisions, evaluate the tax consequences of various exit strategies and consult on a merger or acquisition.

Prepare for the changeover

If your client chooses to put the business up for sale, it’s critical to get the business in “move-in” condition. So, make sure your client obtains accountant-prepared financial statements and implements a strong system of internal controls that includes mandatory vacations, as well as separation of duties.

Also, to ease the transition to new management, your client should formally document job descriptions, update the organizational chart, train and retain second-generation managers, and bring business plans and financial forecasts to the negotiation table.

Work with the pros

If you have clients who have indicated a desire to retire or sell their businesses, be sure to retain a valuation professional. They can provide many services that can help an owner determine their financial needs when it’s time to retire and smoothly transition out of the business.

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Michigan Business Network is an online broadcasting company that provides knowledge, news, and insights into Michigan’s businesses, industries, and economy.