Article: Bowing Out Gracefully ... and Skillfully


	Lynn Westergard

September 2007

Bowing out gracefully ... and skillfully

The true value of your company may depend largely on the effectiveness of your exit strategy

For business owners who have spent their lives building a business, retiring or moving on to the next opportunity may not be an easy prospect. Many owners lack company-sponsored pension plans, and most of their wealth is tied up in the business. If you are facing this situation, now is the time to start developing an exit strategy.

Unlike people whose investment portfolios are diversified in many different stocks and bonds, business owners tend to have invested the majority of their funds in one thing: their company. This can make it difficult to cash out when it’s time to move on.

An exit strategy involves developing a plan for:

passing on responsibility for running the company,
transferring ownership, and
extracting your money.

Because a stable business is worth more than an unstable one, creating a seamless transition is essential to maximizing business value.

Developing an effective exit strategy involves planning on several levels, including consideration of corporate changes, personal lifestyle changes, family issues, and income and estate taxes.

The cornerstone to any exit strategy is knowing what your business is worth. Your company’s value is probably not equal to its book value, as many other elements play a role. A professional valuation will lay a solid foundation for creating your exit strategy.

Assess Your Needs

The first step in creating an exit strategy involves assessing your needs. Important questions include the following:

Have you identified a family member or trusted manager to succeed you in running the company? If not, you may want to consider selling your business to maximize value and avoid a crisis.
Have you planned for estate taxes? If you don’t have the liquidity necessary to cover your estate tax liabilities, consider buying life insurance or creating a gifting program.
Will other factors, such as relationships with other shareholders or changing market conditions, play a role in your business’s future? Disagreements with other shareholders or risky market conditions may dictate the type of plan with which you feel most comfortable.

Depending on the results of your needs assessment, you have several alternatives.

Set up an ESOP. An employee stock ownership plan (ESOP) can effectively transfer all or part of your company’s ownership to employees while providing you with liquidity.
Go public. If your company has enough size and growth to warrant it, a public offering can raise capital and gain liquidity. However, an initial public offering is costly, as is complying with the ongoing reporting requirements. And because the market will expect you to stay on as a significant shareholder for some time after the public offering, this is a long-term exit strategy.
Sell your shares back to the company. If you have other partners, you may be able to structure your buy-sell agreement so that the company or other shareholders buy back your shares.
Bring in a strategic partner. If you still have some time before retirement, bringing in a strategic partner – either through a merger or a joint venture project – may provide you with the liquidity to diversify your investments now. It may also provide you with a future successor.
Make a private sale. When planning a private sale, consider your logical buyers, such as current management, a customer, a competitor, or a private investor. Determine if the sale is likely to be outright, a leveraged buyout or an installment sale. Plan now to ensure that you have the liquidity you need when you leave.
Gift to family members. If you plan to transfer ownership to a child or other family member, creating a gifting strategy early will allow you to reduce transfer taxes. We can help you transfer ownership in a way that will enable you to retain control.

Now Is the Time

Once you have evaluated your alternatives, create a plan to achieve your retirement or post-sale goals. Consider everything from the transfer of management to the transfer of ownership. Put the plan in writing and distribute it to those involved.

Now is the time to begin creating an exit strategy. You should devote the same amount of energy to your departure plans that you did to building your business, so that you can fully realize the value that you have created. We can help you assess your needs and evaluate your options, from determining your individual cash needs to helping you establish a fair selling price for your business. Please feel free to call us with any questions.

Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market.