9 steps for successful exit planning

Every business owner will leave his or her business some day, whether voluntarily or involuntarily. The astute business owner who wants to leave in style must create and preserve the value of the ownership interest.

The typical business owner is so busy spending the day fighting alligators that there is little time left to arrange for personal planning. As a result, most business owners fail to plan for their own exit from business, causing lost value.

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With the value of the business representing a substantial portion of the owner's personal estate, harnessing that value to allow the owner to retire in style is essential. This planning, which should start years before the projected retirement date, is called exit planning.

We find that if a business owner does any succession planning, it is typically limited to a buy-sell agreement. Unfortunately, the agreement serves as an exit plan only if the owner dies and the owner's interest is bought out by the other co-owners. An exit strategy goes far beyond the buy-sell agreement.

Exit planning encompasses the following:

Step 1: Establish the initial owner-based objectives, including a determination of the income needed to secure financial independence from the business; the proposed departure date even if it is only tentative; and the most likely transferees of the business such as family, key employees, co-owners or outside third parties. These objectives give direction to the exit strategies to be developed.

Step 2: Determine the value of the business using the same valuation process used by the Internal Revenue Service. This value is not the same as a projected sale price because an owner typically wants a lower value if the transfer is being made to family or key employees as opposed to an outside party.

Step 3: Identify available income sources other than the business. By comparing the amount of income needed for financial independence (step 1) with the available income, it is possible to determine the additional income that the business transfer needs to produce.

Step 4: Use an advisory team consisting of an accountant, business lawyer, insurance professional and financial planner to fine-tune the exit goals and strategies. The advisory team should conduct a legal audit to become aware of potential litigation traps and ensure that the business will be ready to transfer when appropriate.

Step 5: Motivate and maintain key employees who can help create and preserve the value of the business. The advisory team should introduce methods and programs to accomplish this.

Step 6: The advisory team should minimize the tax burden of the company so that the value-building strategies are not impeded. This is particularly true with respect to the qualified plans or other tax-deferred plans.

Step 7: The advisory team and business owner must identify the best way to leave the business. If the transfer is to be made to family members, clear communication and precise planning processes are required to avoid family disputes with children who are not involved in the business.

Step 8: The business' attorney needs to draft the business continuity agreements. These agreements will assure that the owner's family is protected in the event of an untimely death or disability of the business owner.

Step 9: The business owner and advisory team must work on a comprehensive financial planning process, which directs the business owner in reaching the personal financial goals. The advisory team will also work with the business owner to design an estate plan that meets the family planning goals and objectives of the owner. With proper planning, the business and family assets can be directed to family members and loved ones while limiting the IRS to no more than its fair share (I suggest zero).

For planning strategies to work to their maximum effect, it is important that the business owner and advisory team have time to work. It is best that the exit strategy be conceptualized when the business is first created. If that is no longer possible, commencing work on the exit strategy should not be further delayed. At a minimum, the design of the exit plan should commence at least five years before the anticipated departure of the owner from the business.