Most business owners spend the majority of their time and effort building and maintaining wealth in their privately-held businesses, and not enough on the transition out. John Leonetti, managing director of Boston-based Pinnacle Equity Solutions Inc., says advisors can assist in developing exit plans for prospects and clients by focusing on the following five areas:
Help your owner set goals for their exit
Business owners know how to run businesses, not how to exit them. The biggest mistake that an advisor can make is assuming that because an owner is good at running their business that they are also competent in establishing an exit plan. Less than 10 percent of business owners have written plans for their exits. As their advisor, you are perfectly positioned to help them discover what they would like to accomplish after they are no longer running the business. Basic goal setting is where it all begins.
Ask the owner questions related to their exit
Trusted advisors gain their status by asking insightful questions. Here are a few exit planning questions to ask that will get your owners thinking about their exit planning.
- Do you know how much money you need to meet your post-exit expenses?
- How involved are you in the day-to-day operations of your business?
- What will you do with your time when you are no longer running the business?
Measure the owner’s financial readiness and time frame for an exit
Most often, the majority of an owner’s wealth is tied to their privately held business. Also, most owners depend upon that business for income and for the maintenance of their lifestyle. Exit planning for an owner includes measuring the owner’s ability to live without the business, as well as when they would like to exit. You can offer solutions about how to replace income and how to provide protection against estate taxes.
Educate the owner on their exit options and value ranges
The most obvious exit option is the sale of a business to another buyer, perhaps someone in the owner’s industry. However, only a small percentage of businesses, less than 20 percent, successfully sell to an outside buyer. The less obvious, and much more frequent, exit strategies include transfers to management teams, to private equity groups, to employee stock ownership plans (ESOPs) and gifting programs to family members.
Each exit option also has a different value associated with it. For example, an owner will likely not get as much money by selling to their managers as they would from an outside buyer. However, the owner’s goals may not be to get the highest price. In fact, the goal may be to maintain their legacy and allow the management team an opportunity to own the business (this is particularly true if some of the managers are family members). Help your owners understand these options and their consequences.
By informing your owners that a variety of exit options exist, you raise their understanding of the exit planning process and illustrate how you can be of assistance with this type of planning.
Get the owners to their goals
The execution of an exit plan is complex. To help an owner protect their illiquid wealth you will need to work with that owner’s accountant, attorney, valuation and transactional advisors. These are important networking partners for you as well. So, get to know the owner’s other advisors and how you can partner with them to get your owners to their exit goals.
John M. Leonetti is the founder of Pinnacle Equity Solutions. For 15 years, he has served as a principal, a manager, a transactional advisor, a legal advisor and a financial advisor to privately held businesses, their owners, and their advisors. For more information visit www.pinnacleequitysolutions.com or www.exitingyourbusiness.com.