Exit Planning: Preparing Today with Tomorrow in Mind

by FEI Daily Staff

Due to need or desire, most business owners will eventually sell their company or transition it to key employees. Regardless of whether that transition comes down the short or longer road, the actions taken today to preserve and create business value will chart a better course for a rewarding tomorrow.

To achieve the highest return, it is important to ask the hard questions and formulate an eventual exit plan during the early stages of a business. A roadmap to a future “great escape” will provide focus and direction; it will also allow an owner to develop plans to motivate and retain key employees in consideration for top seats, in the event that the business is transferred to the management team or sold outright to a third party.

But that map could lead down a road to nowhere in the absence of established goals, not only for the business but also for the business owner. In order to select an exit path, objectives — financial and otherwise — must be identified and plans put in place for how best to achieve those goals.

Perhaps there’s a specific selling price needed to maintain an owner’s lifestyle, post transfer or sale. Maybe an owner wants to break into a fresh market or introduce a new product line before hanging up the reins. It could be that the company needs to bolster its reputation and therefore its marketability. What must also be taken into account is the degree to which the current owner will be involved in the business following the sale or transfer. Some owners will prefer a complete departure, while others may want to continue to play a lesser role within the organization.

Know the Value

As consistent objectives and motives are developed, the next step in the process is placing a value on a company and determining its marketability. An independent valuation provides a solid basis for goal planning. Knowing the value of the business at the start of planning will provide valuable feedback on what actions can build business value and which may harm that value.

With the knowledge gained from the valuation process, the owner can focus on the areas — termed “value drivers” — that will promote and preserve business value during the planning process. Recognize that a successful exit plan involves a number of elements including legal, financial and tax. Therefore, it’s vital to work with an experienced team of professionals, including an attorney, financial adviser and appraiser. Those who attempt to go it alone often leave a lot on the table in terms of money, time and emotional well-being.

Financial Statements are Key

The importance of financial statements also cannot be overstated when going through the exit plan process. They provide a clearer picture of current financial position, in effect gauging what has already been accomplished and what still needs to be completed to create a successful exit plan. These critical statements supply cash flow information, which is used to determine the value of a business and the price for which it might be sold. They show historic earnings, cash flow results and trends that have been established over the years to create an indicator of the company’s financial future.

Take note: Those planning to sell a business during the first half of 2012, for example, will need cash flow projections for the remainder of that year, in addition to the years 2013 through 2015. These projections must be grounded in the reality of past actual performance, rather than rosy hopes for the future.

Plan the Company’s Future

Owners should decide early on who will run the business if and when he or she leaves. It makes no difference if the plan is to someday transfer ownership to the management team or sell to a third party — owners must take measures to include those key individuals in decisions that will affect the business’s future and provide incentives to essential employees to work toward the goal of building business value. A business overseen by several top-notch employees has a process in place that can better build productivity and cash flow, in addition to adding value to the table when the time comes to sell.

Making arrangements for the “end” of a business can seem overwhelming. Plus, it’s not easy to think about the business the owner bore, bred and nurtured being in the hands of someone else. But that day will likely arrive, and when it does, potential buyers will want the obvious — a business with robust monetary value, a solid management team, a positive industry/market reputation and a strong competitive advantage.

This article first appeared in Financial Executive magazine.

Bob O’Hara is president and CEO of O’Hara & Co. in Chelmsford, Mass. Founded in 1995, the company helps entrepreneurs create comprehensive exit strategies for their businesses. For information, visit