Taking the road to exit planning.

There are more than 12 million businesses in the U.S., and over the next five to seven years, more than half of them will change hands. Of the six million owners who will sell their business in this period, most will not take specific steps to ensure a smooth transition from their ownership. Even the few owners who have attempted to plan for their exit find their efforts usually fall far short of a comprehensive exit plan.

Why? Two reasons most often cited by business owners are: being too focused on the company's day-to-day requirements to take the time to plan, and uncertainty over how to begin exit planning due to a lack of comfort with how the process actually works. The emergence over the past five years of exit planning as a defined, disciplined process has begun to show business owners how they can control their exits.

The Foundation of a Successful Exit Plan--The Seven-Step Process

The most effective exit planning process includes seven individual steps. Each step builds off the others, creating a comprehensive plan that guides the owner through the day he or she exits the business. These steps are designed to follow a sequential logic.

Step 1. Determine the owner's exact financial (cash) needs and personal goals for retirement. The key here is to be as detailed as possible in articulating the goals; the more specific the goals, the more specific and effective the exit plan.

Step 2. Understand the (cash) value of the business today. Ownership in the business is usually either/both an owner's most valuable (cash) asset, or the asset that is most likely to be the catalyst needed to realize the owner's personal goals.

Step 3. Identify specific, realizable steps to preserve, promote and protect the value of the company through the exit. The most common application of this step involves the motivation and retention of key employees, but might also include areas such as priming the pump to increase sales, taking measures to protect profit margins, shoring up financial reporting systems and dealing with potential liability issues.

Step 4. Explore selling the business to an outside party. This is often (sometimes mistakenly) viewed as the best option for maximizing financial objectives in an owner's exit. An important element within this step is to understand the tax consequences of a sale, and what might be done to maximize aftertax proceeds.

Step 5. Evaluate the dynamic of selling to an inside party (employees or family members) against tax implications and the owner's need for financial security. Almost 75 percent of all business transfers are to inside parties, yet these transfers are the most complicated because insiders usually have the weakest financial (cash) resources and are the most tax-sensitive (especially for family members facing estate tax issues).

Step 6. Creating a continuity plan for the business to guard against the death or disability of the owner. This step is crucial because no exit plan can stay on track if the owner's unexpected absence is not addressed. The continuity plan tackles issues such as ongoing capital needs, allowance for changes in decision-making systems, specific actions to be taken with the balance sheet and operations, and related items.

Step 7. Ensure the exit plan maximizes the value of the owner's estate. This final step is intended to ensure that the exit plan and estate plan are in sync. This includes checking to ensure that the income/wealth needs of one's spouse and heirs can be adequately met within the parameters of the exit plan, and that the plan ensures the equitable distribution of assets. It also involves reviewing the income/wealth needs for tax efficiency purposes.

The Unseen Step: Working with An Advisor Team

This seven-step process is valuable in large part because each step along the way is clearly identifiable, making it easy to stay on track to complete an exit plan. The most crucial element, arguably, is having an advisor team committed to the exit planning process. The best advisor teams include a team leader practiced in exit planning, with a defined system that addresses these seven steps.

In addition to the team leader, the advisory team should include professionals who play an important element in both creating and servicing the owner's exit plan. These most often include the owner's lawyer (corporate and estate), accountant, personal insurance agent and financial planner. The team may also include the lead banker, company valuation specialist, business consultant and other advisors who have an easily identified value to bring to the owner's exit plan.

A process like the one outlined above is the simplest, most complete process for getting owners to not just start thinking about an exit, but to actually create a plan they can stay with until their exit is finished.

Will Lindenmayer is Director, Exit Planning for Clayton Capital Partners, a St. Louis-based investment and merchant banking firm specializing in business transactions. The firm has a dedicated exit planning practice. He can be reached at 314.725.9939.