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Exit Planning: 3 Common Readiness Issues

Exit Planning: 3 Common Readiness Issues

It’s inevitable that there will come a time when every business owner must transition or exit their business. Planning for this exit well in advance will ensure that the transition will go smoothly and according to the terms the owner desires. However, business owners frequently underestimate the time and effort that is required to properly plan for their exit, which can often lead to the business or the owner not being ready for the transition. The three types of readiness that need to be addressed during the exit planning process are personal, financial and business readiness.

1.   Personal Readiness

When it comes to personal readiness, owners need to ask themselves what is next for them personally and professionally after they exit their business. A lack of personal readiness for an exit comes from having:

  • No goals and objectives or thought about “what comes next”
  • No advisory board or formal transition team
  • No contingency plans
  • A dated buy-sell agreement
  • No shared vision by shareholders and/or family members
  • A forced generational transfer

Owners need to envision what their identity will be without running the business. To help plan for retirement, they can think about what is pushing them to exit. For example, what drivers are motivating them to exit? What future life visions will get them through the hardest parts of the exit?

2.   Financial Readiness

A business owner needs to be financially ready to exit the business in order to support “what comes next.” Financial readiness focuses on assessing the overall financial health of the owner. Starting to have financial conversations about the following topics early can help avoid financial readiness issues that can delay an exit:

  • Financial needs and wants during retirement
  • Income requirements needed after the transition to support the desired standard of living
  • Realistic value of the business and the after-tax net proceeds that can be realized
  • Tax planning for the sale or other transition of the business ownership interest
  • Investment portfolio allocation
  • Ensure the financial plan is aligned with the personal plan

Business owners should consider that the current value of the business might not support their desired lifestyle in retirement. An exit planning advisor can assist with getting an open market valuation of the business to understand its current worth and  strengths and weaknesses from a buyer perspective. These tools can then be used to work to protect the current value of the business and to increase the value of the business before an exit takes place.

3.   Business Readiness

Has the business’s human, customer, structural and social capital been developed and assessed for value? To know if a business is ready to be sold, it must be looked at from the buyer’s perspective. Here are some common business readiness issues business owners may have when they are trying to sell:

  • Owner dependency, everything runs through the owner
  • Lack of documentation and transferrable and scalable systems and processes
  • Valuation not as high as desired or needed in order to retire
  • Lack of credible financial information such as accountant prepared financial statements, interim financial statements and reliable forecasts
  • Uncertainty around retaining management and key employees through an ownership transition
  • Concentration of sales in just a few key customer accounts

Evaluating the business to identify and address value-detracting elements while establishing a transition advisory team and planning for de-risking are key to business readiness. Addressing issues of readiness will help make the business valuable, transferable, attractive and ready for a potential transition at any point.

Brown Plus Transitions can help evaluate how ready you and your business are for an exit. Contact our team today to get started with your businesses exit plan!

Posted In: Brown Plus Transitions | Brown Plus Transitions | Insights

About the Author - Carli Lehr, CPA, CVA, CEPA, CM&AA

Carli is the Director of Brown Plus Transitions. In this role, Carli assists clients who are approaching transitions, whether that be business or personal, including business valuations, M&A advisory services, litigation support services and exit planning across Central Pennsylvania and Maryland.

Carli earned her Certified Valuation Analyst (CVA) designation from the National Association of Certified Valuators and Analysts. She is also a Certified Public Accountant (CPA) in the Commonwealth of Pennsylvania as well as a Certified Exit Planning Advisor (CEPA) from the Exit Planning Institute (EPI) and Certified Mergers & Acquisitions Advisor (CM&AA) from the Alliance of Merger & Acquisition Advisors (AM&AA).

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