No exit is easy

Successful business owners can adapt and compete in a constantly changing marketplace. However, exiting a business requires an entirely different set of skills. Even with extensive knowledge about growing a business, most owners have no experience successfully exiting one.

Having a well-structured written exit plan is an important first step to exiting a business. Then, assembling a strong team of seasoned professional advisers (attorneys, accountants and wealth planners, for example) who have assisted other business owners with their exits is essential to crafting and executing a successful business exit.

There are six common traps business owners tend to fall into that often can lead to an unsuccessful exit and financial or emotional agony. The best way to avoid falling into these traps is to be aware of and understand them.

Not so easy

Many exiting business owners wrongly assume a business exit is simple. However, consider this: Building a business is a daily challenge that requires a flexible plan and the ability to adapt, execute and compete in the ever-changing marketplace. However, successfully exiting a business could prove an even bigger challenge.

According to San Francisco-based Ran One Consulting Group Chief Executive Officer Ronen Shefer, an average of 80 hours are spent writing a business plan to grow a business and an average of only six hours are spent planning a business exit.

Strategic planning for succession is critical for a business's future success. Many businesses have several owners and key managers whose departures must be well-timed to have mature leadership during these transitions. This process tends to be more emotional in family businesses and can become complicated if there is not open communication and a mutual understanding among all stakeholders. Further, all this requires training, mentoring, flexibility and time to execute.

Planning, revising and executing your exit strategy will save you time, money and headaches in the future. Careful planning is required to handle this complex task because business exits are rarely, if ever, easy.

Exit options

Another mistake exiting business owners often make is believing that selling is the only way to exit a business. In fact, selling is just one of several exit strategy options available to an exiting business owner. Unfortunately, owners who exit their businesses without strong advisory teams often overlook the most effective strategy to meet their needs because of a basic lack of knowledge.

Structuring a management buyout, creating an employee stock ownership program (ESOP), exploring gifting strategies and selling partial company interests to a private equity group all are options that must be explored by a business owner and his or her advisory team to identify the best course of action. Each option has implications that can affect the exiting owner's length of employment, value of the business, tax implications, amount of fees, control, etc. Once all options are explored, an informed exit decision can be made.

Procrastination

With so much information to process, it can be easy to postpone creating an exit plan. However, an exit strategy ideally should be created at the same time as a business plan and assessed and adapted as necessary during the business's life.

Creating a written exit plan provides a path with an end goal to strive toward through meeting smaller goals. Creating a written plan also allows you to envision the ultimate results of your labor. If you put off beginning your exit planning, it may, unfortunately, quickly become too late.

Many business owners procrastinate until they are ready to exit their businesses. They do not understand the preparation process can take up to two years and the departure up to 10 years.

Furthermore, it is prudent you have your business in condition for a sale, succession, buy-sell agreement, estate planning, etc., should you experience health issues or decide you want out of your business immediately. Having your business in a ready condition will increase its value and give you more control of selling options.

Don't go it alone

All too often, exiting owners believe their success with their businesses qualifies them to design and execute their business exits without assistance. Just because you have proven success in one field does not mean you will achieve success in another discipline—or, more practically, that you will have more experience and ability than a team of advisers who have encountered numerous scenarios.

To build your business, you likely relied on the expertise of key advisers, so why would you act any differently when exiting your business? By building a professional team, you can focus on running your business and stand to gain the greatest financial and emotional freedom.

Exit strategies require a team of professionals who understand estate planning, taxes, deal structuring, legal documents and agreements, financing, negotiations, valuation and wealth management (including retirement income planning and different types of transfers). These professionals can include attorneys, tax attorneys, accountants, bankers, valuators, wealth managers, insurance specialists, and merger and acquisitions professionals. An exit planner should coordinate this collective process in a holistic manner to have everyone focused on the business owner's challenges and avoid a duplication of time and effort.

Personal and family concerns

Business owners often fail to adequately consider their emotional attachments to their businesses or to the stature and time consumption that owning a business entails.

Many business owners who proceed without a plan balk at exiting when they realize they will not have a daily purpose or goals to meet. For this reason, many owners will subconsciously avoid the topic of exiting their businesses.

All succession plans require open communication and a focus that a business' success and direction be given the highest priority. Family members may not be prepared for the emotional and financial developments ahead. An honest discussion about potential changes in family roles and responsibilities is necessary when considering your intent to exit your business.

Tax issues

Remember: It's not what you get for your business that matters but what you get to keep. From selling the business to a competitor versus other exit options to specifics such as Internal Revenue Service (IRS) filings and transaction structuring, each option you encounter will have its own tax implications, costs and benefits.

For example, an ESOP under IRS Section 1042 can indefinitely defer capital gains taxes of a closely held C corporation under several conditions. A written exit plan can describe all the viable options, values, and tax and fee implications. Further, this is where a strong advisory team—specifically, a tax attorney or specialist in business transactions—is crucial.

With a properly planned exit strategy, you will know before deciding how or when to exit your business which options will provide the greatest net profit after taxes and fees.

Crucial planning

Selling your business may be the most significant financial event of your life. No matter where you are in your business life cycle, creating and routinely adapting a written plan for your business exit strategy is a critical part of planning your exit.

Remember these six exit strategy traps so you will be prepared to avoid them during your own business exit. Your business is an investment, and, as with any investment, you must study and plan to ensure the most financially and emotionally profitable outcome.

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