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John Leonetti, author of Exiting Your Business, Protecting Your Wealth – A Strategic Guide for Owners and Their Advisors [John Wiley, 2008] outlines a six step process for creating an exit plan

1. Plan for the exit
2. Determine your financial and mental readiness
3. Determine what type of exiting owner you are
4. Learn about the exit options available to you
5. Understand the value of the options you choose
6. Execute your exit strategy plan

A Personal Plan for Freedom
Every business goes through lifecycles and every owner reaches a point of personal exhaustion with running a business. The intersection of these two competing phases is where a good exit plan provides focus and direction. The driving force of the exit plan will be the personal goals of an owner. How much money is needed outside of the business to survive without it? What is the timeframe for exit? Do you know who will run the business in your absence? These are critical questions to ask yourself. The answers to these questions (amongst others) will set the stage for determining which exit option is best for you.

Options Beyond the Outright Sale
The most obvious exit option is the sale of the business to another buyer, perhaps someone in your industry. However, most owners are not ready to get out today. It is also important to note that 80% of attempted business sales fail. Therefore, you are well served in knowing other exit options to align your decision making today?

One option is bringing in a financial partner. This may help with alleviating the financial needs of the business, i.e. investing someone else’s capital for growth instead of raiding your retirement fund.

Another option, which can be powerful and flexible is an Employee Stock Ownership Plan (ESOP). An ESOP is a qualified retirement plan that creates a purchaser for your stock and gives you cash (or a note) in return while allowing you to maintain control of the company.

Management buyouts are available and should be carefully considered. Choose your successor wisely and begin the conversations early. Owners with personal savings outside of the business (“high financial readiness”, see EYB, Chapter 2) generally are better suited for this option. Other considerations for this option are the timeframe for ownership transfer, who will lead the management team, and how and when you will get paid.

A final exit option is gifting. When stock is intended for family or charities, gifting strategies can transfer shares and provide personal planning and estate tax benefits.

Regardless of which exit strategy a business owner chooses, it is important that they determine their exit plan well before they actually need to implement one. This advanced planning will help ensure each option has been thoroughly evaluated. Knowing the final direction of the company will help with strategic decisions years before the actual exit. Following the six-step process outlined in Exiting Your Business, Protecting Your Wealth will put you on the right track today for tomorrow’s exit.