The Covid-19 pandemic has wreaked havoc on businesses across industries and forced many to permanently close as supplies became scarce, demand virtually evaporated and at-risk employees stayed home.  For companies that have been able to remain in operation, these last several months have been a wake-up call to take action.

Even without a global pandemic, the odds are only about 50/50 that the way you’ll exit your business will be within your control, according to the Exit Planning Institute, a Cleveland-based organization focused on training and certifying professionals in the field of exit planning. Other unforeseen events—like a death, divorce, disability, disagreement among partners—can strain financial and emotional resources, jeopardizing future viability. But careful exit planning can help you increase the resiliency and sustainability of your business, helping ensure you are better prepared for whatever challenges you might face.

Exit Planning Is Just Good Business
Despite the name, exit planning isn’t just about how you’ll leave your company at some time in the future. It’s an ongoing process of building business value now and maintaining that value over time. The goal is to help ensure that your eventual exit from the business is on your terms—whether that entails a sale to a third party, a transfer to the next generation, or something else—and puts you in a position to achieve all your important financial objectives.

“Developing an exit strategy does not mean you are not fully committed to your business today,” said Kelly Baumbach, CFP, CEPA, and managing director at Wealthspire Advisors. In fact, it’s just the opposite. An exit plan is a framework for making thoughtful investments to address business risks and strengthen fundamentals. The result is a higher valuation in the short term, as well as when you’re looking to sell.

Martha Sullivan, co-founder and president of the Wisconsin chapter of the Exit Planning Institute, and founder of Provenance Hill Consulting, agrees. She is an exit-planning specialist who urges owners to treat a business “like a homeowner treats a house. You wouldn’t let your home fall into disrepair just because you weren’t planning to sell right away. Responsible homeowners perform regular maintenance that keeps the house in sellable condition all along, with a good roof, strong foundation, and ample curb appeal.” Similarly, business owners should continuously look to make repairs and improvements that will maintain—and increase—the market value of the enterprise.

Busy business owners are often conditioned to focus on the bottom line. While income is important, when you consider that most businesses represent 80-90% of the owner’s net worth, it’s clear that a lot hinges on the eventual sale price of that key asset. The good news is that strategic investments that contribute to market value—such as strengthening balance sheets, implementing a robust accounting system, reducing client and vendor concentration, and managing key-person risk—will not only pay off in long-term value, but they will also likely boost income at the same time.

Prepare For A Transformation
According to the Exit Planning Institute, a survey of former business owners found that a full 75% “profoundly regretted” selling their businesses 12 months after finalizing the deal. Sullivan cited two reasons for those results. The first is that the owners were disappointed in the sale value of the business. “The price might have been fair, it just might not have met the owners’ expectations,” she explained. A business is worth only as much as someone else is willing to pay for it, and not all business assets are transferable. For example, imagine a business where nearly all of the operational knowledge or client relationships belong to the owners. They might feel certain that the business has value, but you’d be unlikely to find anyone to buy it at any price. That’s why it’s critical to start with an objective analysis of the market value of the business. “If your personal financial statement lists a business value that is little more than a wish or a guess, that sets you up for a disappointing outcome,” said Sullivan.

But a second factor might have contributed to the former owners’ regret—like many people who retire from an all-consuming career without a clear plan for the future, they may have felt a loss of identity or purpose after the sale. “The exit from a business isn’t merely a transaction,” explained Sullivan. “It’s a transformation of life for the owner, as well as for their family and employees. Far too many owners have that realization after they put down the champagne glass. That’s when they ask: ‘Now What?’”

“There are many aspects of leaving a business that are purely emotional,” said Baumbach. That’s one reason Baumbach and Sullivan work closely with business owners and with each other to plan and execute personalized exit strategies based on each owner’s vision for life after the sale. Baumbach creates an overall financial plan that aligns with the owner’s financial priorities—including their wishes for their retirement lifestyle, charitable giving, or gifting to the next generation. She then works backwards to determine the value needed from the business to support these objectives. Together, they can identify any gap between that figure and the actual valuation, and work with the business owner to establish an achievable plan to address the difference.

Put Time On Your Side
The earlier you start those conversations, the more—and the more appealing—paths you’ll have to choose from. For example, let’s say an owner discovers she needs $10 million from her business to achieve her financial goals. If the valuation analysis reveals that the business is worth only $8 million, the owner will likely need to sell to an external buyer to maximize the sale price. At the same time, she will need to scale back her retirement income expectations.

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