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Prepare To Exit |

Defining Your Goals and Expectations For The Exit Plan

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The starting point for any plan is defining goals.

By determining both your long-term personal and professional goals, you can begin the planning to exit your business. Of course, there are many competing interests to consider in the process. In addition to your personal goals, you need to include key employees, partners, and family members in your decision making. To maximize the effectiveness of your exit plan, all of these parties should have input into the development of the plan.

The owner of any business functions in several capacities and, because of this, they have many competing goals:

  • The owner of the business normally is also the company’s Chief Executive Officer. He or she is constantly focused on growing the company and improving its profitability. As such he or she is actively involved in day-to-day decisions and wants the company to be competitive.
  • The owner of the business is normally also one of its largest shareholders, if not its only shareholder. Investments in closely held business are considered to be illiquid because the stock cannot be sold easily. At some point, all investors desire the opportunity to convert their illiquid investment in a closely-held business into a liquid asset. The goal would be to move from a concentrated investment risk to a diversified investment risk for retirement assets.
  • The owner of the business is also frequently an older person. As such, they are looking forward to retirement. They want to know that they will be able to enjoy a comfortable retirement after putting in many years of hard work and sacrifice into making their business successful.
Because each of these roles may have conflicting goals, it is important to carefully consider them to clarify the business owner’s expectations. We will now consider the business owner’s five primary concerns as we explore your goals:

  • How long do you want to stay involved in the business? Would you like to retain a role in your company after you sell it, gradually withdraw over a period of time, or immediately walk away from the business after selling?
  • What are your financial needs in retirement? What level of income will you require to live comfortably after you sell the business?
  • Do you plan to keep your investment in the company after you exit? Do you plan on cash out your entire investment in the company immediately upon completion of your exit plan or are you willing to receive payments over a period of time?
  • Do you plan on considering the interest of others in developing your exit plan? Are there family considerations to be considered in the development of the plan? Do family members work for the company? Do you have key employees that need to be considered in the process? What will the impact of your exit have on your customers?
  • Do you have charitable intents for your legacy? Do you plan on creating a charitable trust or foundation in the future?

Continued involvement in the business

If the business is to continue after your exit, you may not wish to immediately walk away. Only you can define your own desire to remain active with the business. Often, this varies based on the equity investment you retain. In addition to the equity investment being a factor in the owner’s decision, management succession is also a consideration.

  1. Does the owner wish to remain chief executive officer for a period of time to prepare individuals for management succession, or to help the new owners with a smooth transition?
  2. Does the owner wish to stay involved with the business, but in a reduced role such as a sales representative, outside consultant, or coordinator of special projects?
  3. Does the owner wish to continue involvement as director of the company?
Keep in mind that you need to clearly set out your expectations for future involvement in the company.

Income expectations upon retirement

Because financial issues are frequently the primary concern of the business owner when planning for their retirement, one of the most critical pieces of the exit plan is to ensure that the owner has enough money to maintain their desired lifestyle. I can’t even count the number of times business owners have told me they don’t have retirement savings and plan to use the sale of their business as a nest egg to fund their retirement. Unfortunately, more often than not, the sales price does not meet the owner’s retirement expectation, so their retirement income is underfunded and they have to adjust their lifestyle expectations.

Most financial planners use a rule of thumb that retirement income should be a minimum of 70% of pre-retirement income. This is only a rule of thumb and may not be sufficient depending upon what the individual plans to do in retirement. It is advisable that the business owner calculate their estimated income needs in retirement as a part of their exit planning process. Our Retirement Plan Calculator might be a good starting point for you.

How to calculate your income needs in retirement

To determine the income level that you will need in retirement, start with your current income and company benefits. Benefits may include auto expenses, cell phone, and medical insurance.

To your current income and benefits, add an allowance for retirement activities that you are not currently spending money on. This may include travel expenses, golf and social club dues, other hobbies, and the purchase of a retirement home or recreational vehicle. Don’t forget about the income taxes you’ll need to pay through quarterly estimates rather than payroll deductions. If you did not add an allowance for medical insurance as a benefit above, you will need to include the cost of medical insurance.

Also subtract expenses you currently have that you will no longer incur in retirement. These expenses may include clothing costs, dry cleaning costs, and travel and automobile costs. If you are saving toward your retirement regularly, you could consider deducting this amount also if you do not plan to continue adding to your savings once you retire.

Once you make these adjustments, you will have calculated the income level that you desire for retirement.

The next step in this process is to determine the other sources of income that you have available in retirement. These other sources may include social security, annual distribution from an IRA or 401K retirement plan, income from investments, and any rental income the business owner may receive.

Another factor that should be considered in calculating the financial need from the sale of the business is the amount the business owner would like their children to inherit.

Once you deduct these other sources of income from your calculated income level, you will have the funding gap that needs to be covered by the sale of the business. If there is a funding deficit, the business owner will have time to make up this difference if they begin the planning process early.

Continued investment in the business

The business owner’s continued investment in the company can be one of the most difficult parts of the negotiation with the new owner. Does the business owner wish to maintain their equity in the new company (a merger) or does the business owner want to immediately get their cash out of the business?

If the sale of the business is to a family member or employees, a structured sale will often be required since they don’t have the ability to purchase the business on their own. This will require the business owner to sell the business in smaller pieces over a timeline that the new owners can afford. Of course, there is greater risk in a structured sale, so you may want to retain a voice in the management of the company until the entire sale is complete.

Owner’s concerns about the interest of others

Another factor that most business owners take into consideration when developing their exit plan is how that decision will impact others. Does the business owner have family considerations to take into account? Are there children involved in the business? Are there children not involved in the business that have to be taken into account? Is the business owner concerned about current employees maintaining their jobs? Is the business owner concerned about keeping the business located in the community or are they okay with the business being consolidated and moved to another location?

These are questions that only you can answer, but they will impact the exit plan’s structure. For example, some business owners are only concerned about maximizing the sales price while others want to factor in the interests of others in the process.

Charitable intent

Does the business owner have an intent to use some of the proceeds from the sale of the business for charitable purposes? Does the owner want to create a charitable trust or foundation to support specific charities in the future?

The exit plan may not be able to address all of the desires of the business owner, however, they need to be listed and prioritized to maximize the benefit of the planning process to the business owner.

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We hope this information answers some questions you may have about exiting your business. For help with other questions, connect with us. Our experienced Relationship Banking Officers will help Make Great Things Happen for your business, wherever you are in the exit planning process.