Workplace

A business owner's exit is a once-in-a-lifetime experience. It is not like selling a house or car; it is a complex process that begins with personal reflection regarding what the owner wants out of his or her business exit.

Each business exit is unique. Contrary to what you may believe, selling your business to an outside party isn't your only option. And there are five steps that can help you determine your primary goals and align your thoughts and plans accordingly.

Part one—devising

The first step in a business exit should be to define your personal goals. Begin with a basic—albeit crucial—question: "What do I want my business exit to accomplish?"

The answer seems obvious—to make the most money after taxes and fees. However, the answer isn't always so simple. Owners often raise their businesses from infancy and care a lot about who will take the reigns. Family members also might be involved with a business, and their fates would depend on the exiting owner's steps.

Defining your goals often becomes a question of liquidity. A substantial source of liquidity outside a business often makes it much easier to define your goals. However, an owner's wealth often is tied up in his or her business, and the owner must balance financial and interpersonal goals to determine the best possible exit strategy.

Assessing your business's "range of values" is a crucial second step. A privately held business's value depends largely on who buys it. The type of buyer can affect the price placed on the business' shares (or assets) and tax consequences.

Internal transfers to employees, family members and co-owners provide fewer dollars upfront but allow greater control of the business, continued income, and flexible timing and tax characterization of payments to the exiting business owner.

In contrast, external transfers to other industry players or financial groups or by initial public offering command more liquidity upfront, and the owner relinquishes more control over the company and payments' timing and tax characterization.

Step three involves examining your options for the transfer of shares. There are seven primary purchasers of privately held business stock (or assets) and various available transactions.

These primary purchasers include internal parties, such as employees through an employee stock ownership plan; charities through a charitable remainder trust; family members through a gifting program; and co-owners through leveraged buyout.

Additionally, external parties can include financial groups through recapitalization; industry buyers through acquisition (at synergy value); and initial public offerings at public market value.

Based on the primary goals you define in step one, you can choose the party to whom your business will be transferred. That designee will determine the limits or expansion of your business's value. That value (after taxes and fees) should then be compared with your financial goal. If the two match, you have devised a successful business exit strategy.

Part two—executing

Step four isn't easy. Assembling due diligence financial records and presenting them to a buyer or successor not only is time-consuming but also is a personal survey of how a business is run and, therefore, a huge psychological block for many exiting owners. Remember, any savvy buyer (or successor) needs to understand a company's financial condition. When an owner is honest about any "creative accounting" he or she has employed during the years to help build wealth and reduce tax bills, the process is smoother.

The final step is to assemble your advisory team. Remember, this is not the time to pinch pennies. Investing in a good team of advisers is worth the cost.

Planning is key

Exiting a business brings satisfaction from achieving a life milestone, but it also brings unexpected challenges. The key to any successful business exit is planning. I will present more information about this topic Feb. 2 during the 2009 International Roofing Expo® in Las Vegas.

Kevin J. Kennedy is president of Beacon Exit Planning, Elmira, N.Y.