We are in the midst of the largest business owner transition in history. Over 8.0 million businesses are expected to be transferred in the next 10 to 15 years. The Federal Reserve estimates that the transfer of U.S. business equity will increase from about $1 trillion in 2006 to over $3 trillion in 2009 to $4.6 trillion in 2014.
A recent survey by a national exit planning organization of business owners who had already exited their companies revealed that 75% regretted the decision. The principal reason given was that the sale did not accomplish their objectives. They didn’t understand their options, so they weren’t able to make informed decisions. The Small Business Administration has reported that the primary cause of failure in business owner succession is a lack of planning.
Based on over 25 years of advising business owners, I’ve found that this can be further clarified as simply having a plan that doesn’t work. This article identifies 10 such plans.
Whether we each realize it or not, every business owner already has some type of “transition plan” or “succession plan” or “exit plan.” We each may or may not have given much thought to this plan. We may or may not have written down any of the components of this plan. Parts of our exit plan might be scattered throughout various documents or actions which we have taken at various times over the course of our business lives.
Your exit plan might be partially reflected in a Will or a Trust or a Buy-Sell Agreement which you executed several years ago. It might be partially reflected in the components of a Life Insurance or Disability Insurance Policy which you established in the past or it might be partially reflected in a tax election you made or didn’t make or it might be reflected in some verbal statements that you’ve made to family members or to key employees or key advisors. Or, a large portion of your exit plan might be reflected in those steps which you haven’t taken.
Below are 10 types of partial, informal and ineffective “exit plans.” As you review this, you should consider what type of exit plan you think you have in place today and whether you believe your plan will provide you, your family, and others who depend on you, with the transition or exit outcome you need, want or deserve. To paraphrase a popular TV commercial: “What’s in your exit plan?”
1. The “Wishes Are Horses” Exit Plan. As the old saying goes, “If wishes were horses, then beggars would ride.” This type of exit plan is by the owner who believes that wishes are actually horses and that a good exit outcome will occur just by wishing it to be so.
2. The “Uncle Sam” Exit Plan. Under this type of exit plan, which is highly favored by your Uncle Sam, your exit will result in the highest amount of tax obligations to federal and state governments on account of your decision not to implement tax-saving strategies.
3. The “Ostrich” Exit Plan. Under this exit plan, you have decided to put your head in the sand by not proactively addressing issues and disputes which you know will occur or need to be dealt with on account of your planned or unexpected exit.
4. The “Mulligan” Exit Plan. In a casual game of golf, the players can, of course, take a shot over, which is called a “mulligan.” This doesn’t work in professional golf. Likewise, it doesn’t work in Exit Planning. For example, if you are disabled or die, without putting the proper strategies and funding in place to deal with your unexpected exit, you (or your family) don’t have the opportunity to do this over. Or, if you’ve lost the key employee who you thought was going to be your successor, because he or she grew tired of the uncertainty regarding your future plans, you don’t have the opportunity to go back.
5. The “Wait and See” Exit Plan. Under this type of exit plan, you are forever and forever unwilling to make a decision about how to proceed. The paralysis that results from always wanting to “wait and see” how things turn out tomorrow before making a decision can be very detrimental. In Exit Planning, we operate under the principle that “all plans are firm until changed.” This means that it’s generally best to establish a plan and then revise and adjust it as needed depending on what happens tomorrow.
6. The “Return to Sender” Exit Plan. In this type of exit plan, a lack of pre-sale planning results in you selling your business to an incapable buyer for an installment note payable who ultimately defaults on the payments, resulting in the business being sent back to you, typically in a lesser condition, to attempt to exit from again.
7. The Exit Plan “In a Box”. This is an exit plan which you have bought into from an advisor who has failed to tailor the particular objectives of your business owner to the particular circumstances of your business and your family by simply imposing a “cookie cutter” approach.
8. The “Deathbed” Exit Plan. This type of exit plan is literally developed on your deathbed which, of course, is generally too late to implement sound decisions.
9. The “Iceberg” Exit Plan. This is perhaps the most common type of exit plan. Here you believe you have dealt with the steps needed to be prepared for a future exit, but you have only envisioned the tip of the iceberg without realizing the depth of other matters that need to be dealt with. This is also known as the “Ignorance Is Bliss” Exit Plan.
10. The “Junk Drawer” Exit Plan. The junk drawer exit plan is the result of the uncoordinated actions of you and your advisors over a period of time. It consists, for example, of a life insurance policy bought ten years ago, a Buy-Sell Agreement executed fifteen years ago, a Will signed when your first child was born, scribbled notes in your desk attempting to start, and start again, to focus on the beginnings of an exit strategy, etc. Like the other 9 plans described above, this “plan” rarely works.
What Kind Of Exit Plan Should You Have?
There are over 100 different Exit Planning tools and techniques utilized as part of approximately 40 exit strategies which informed business owners are very successfully using around the country to provide the missing components of a solid, effective exit plan. These tools and techniques can help assure that you can successfully enhance and protect your current and future business profits and value, as well as successfully pass on or sell your business upon your retirement, disability or death.
Using a systematic 7 Step process, and working with a business owner’s trusted advisors, we are developing thorough, effective Transition Exit Plans for business owners which utilize the correct tools and strategies to address a business owner’s specific personal, financial, tax and legacy objectives. Several of these tools and strategies need to be implemented over time, so this process is best begun at least 10 years ahead of your expected retirement.
You can’t simply wish for your exit to be successful and then expect it to be. You need to actively cause your exit to be successful. Every journey begins with the first step. However, for those journeys that are successful, that first step begins with a well-defined plan.