Exit strategy: How to avoid brokerage devaluation

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If you are like most benefit advisers, you spent more time planning your annual holiday party or summer picnic than you spend on planning your business operations. What’s wrong with that picture? You have been overwhelmed with the shifting market conditions over the last few years. However, these are all critical issues and you should approach this process as if your business life depended upon the outcome — because it does.

For example, on the topic of business continuation, what plans have you made for the single largest asset that you own? What will be the disposition of your business if you are no longer there? Some of you are saying, “I’ll sell my business for a big multiple.” That may be, but realistically valuations fluctuate based on market conditions, and compensation compression has minimized the likelihood of substantial business asset appreciation. Couple that trend with more “boomers” seeking retirement, and you have a very real scenario over the next five years (minimum) where the number of sellers will be increasing while the number of qualified buyers will remain the same or diminish. That’s a formula for the devaluation of your life’s work. Is that what you want to count on when it comes to your financial future? So where do you start?

Let’s consider some very essential questions: Do you have a business continuation plan? Is there a succession plan? What is your personal exit strategy? What are your personal goals for the future? How long do you want to remain active in your current business? Do you have other career aspirations during the next phase of your life? What are your personal financial goals? Do you have family members, or key management team members, that need to be considered? If you can’t answer these questions, you are not alone. But being a member of a large group with shared problems is a small consolation when it comes time to deal with the disposition of your business. There’s a Japanese proverb that’s applicable: “When you’re dying of thirst, it’s too late to think about digging a well.”

Some of you are saying, “My employees will take over my business operations.” Well, that’s likely a 5-10 year transition period at a minimum. Do your employees, as a group, have the financial resources to purchase the equity in your business? Alternatively, do your key managers have the ability to pay you 25-40% of the value of your business in cash? Not likely. So, have you planned for an orderly transition? Do you have an employee stock option plan? An ESOP might be an option if you have a 10-year outlook (minimum), since it will take that long for employees to accumulate enough cash in the plan to substantially buy out your equity interest. Or have you already waited too long with no viable succession plan for the future?

Here’s another point to consider: Do you have the right management talent in place to run the business operations in your absence? After all, your future income stream from any earn-out period will be contingent on your managers’ abilities to successfully grow the business and maintain profitability. And that assumes that your key managers have the financial wherewithal to pay you a substantial amount of cash at closing and make any earn-out payments regardless of the market conditions going forward. There are numerous other scenarios to consider as well.

There is no one solution that fits every situation. It all starts with your personal goals and the answers to the questions we posed earlier. It requires thoughtful consideration, business acumen and planning. And your personal commitment to a process that will assure the continuation of your business and solidify a legacy of success.

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