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Exit or Succession Planning For Small Businesses

At some point in time in time every business owner will “exit” their business. In most cases, a small business represents a significant component of family wealth and the owner will be keenly interested in maximizing this value when the business is either sold to an outside 3rd party or key employee, or transferred through an orderly succession to a family member.

Unfortunately, most entrepreneurs are so immersed in the daily demands imposed in operating their company that they have neglected to properly plan for the inevitable transition of their business. The goal of this article is to briefly review the exit/succession planning process and highlight the importance that these plans have for every business owner. Whether the goal is to exit the business in six months or ten years, it is critical that a business owner recognize that succession planning is the single most important way to take control of the terms and conditions of exiting their business. Proper exit planning will reduce the variability of the business control transfer, and can secure a sound financial future for their family.

WHAT IS EXIT PLANNING?

Exit Planning, also commonly referred to as “business succession planning,” is a methodology that addresses three critical questions a business owner will face at some point in time:

1. What is the timetable the owner seeks to exit the business?
2. Who will succeed the owner when the business is transitioned or sold?
3. How much income is needed from the business transition/sale for retirement?

The Exit Plan becomes a written roadmap that is developed in conjunction with legal, accounting, and financial professionals and is designed to maximize the value an owner receives when exiting the business. Exit planning can be a fairly complex long-term process and take many years to properly implement. The process can be broken down into succinct action items and deliverables and should illustrate how value can be received at a very early stage. A professional team will bring efficiency to the process by implementing a basic structure of steps to be followed, and can insure that the experience will be a personally gratifying and financially rewarding endeavor for the owner.

The key steps involved in developing an Exit Plan include:

1. Establishing Exit Objectives

• Determining the retirement timetable, long term income needs, and financial requirements necessary to reach them.

2. Identify the key drivers of business value

• What is the fair market value of the business if it were sold today?

3. Plan to build & preserve business value and reduce risks

• Activities that can be implemented to leverage best practices and maximize the business value.

4. Transfer of ownership, management, & control

• Determine the anticipated buyer (outside 3rd party, key employee, family member) and develop the structure for ownership transfer that maximizes financial security while minimizing taxes.

5. Contingency Planning

• Protect the continuity of business operations should an unexpected event occur.

6. Wealth management/preservation

• Secure financial independence by developing a financial plan to manage the income from the business sale.

7. Successful Exit

While nearly all business owners will recognize the importance of having a formalized exit and succession strategy for their future and the future of their company, very few actually have a plan in place. What most business owners fail to recognize is that the process is fairly easy to initiate and can be done at a minimal expense. While many components of the Exit Planning process will require the expertise of a CPA, Attorney, and Wealth Manager, significant value and efficiency could be achieved by implementing this process through a competent Business Intermediary/Brokerage firm.

An experienced business intermediary firm will be able to streamline the exit planning process significantly by taking the lead in the planning framework and tapping the necessary resources (accounting, law, wealth management) over time as they are required. This team concept is very cost effective for the business owner as he is only paying for the specific services at the time of use. A business owner is now able to put a toe in the water and establish the framework for the exit plan at very little cost. By establishing the current market value of the business in conjunction with a determination of the owner’s exit timetable and the income needed for retirement, the Business Intermediary will have the essential elements for the foundation of the Exit Plan.

Implementation should be viewed as a process versus a one-time event, and the most successful and rewarding Exit Plans are those that are started years in advance of the business transition. Whether the planned exit is six months or ten years from now, an owner should be proactive. The longer that a business owner has to implement the Exit Plan, the greater the opportunities will be to maximize the business value, minimize tax liabilities, avoid key employee turnover, and eliminate emotionally charged family issues.

The Role of a Business Broker

Selling a privately held business is a very complex process involving many variables and it is important for the business owner to seek expert advice. By developing the framework for a business exit plan and establishing a specific timetable of actions to be taken, an owner will have a clear plan of action and be in complete control of when and how they will be leaving the business. Understanding the current market value of the business and how that value is derived is critical to projecting the after tax proceeds that a sale would generate and how that number correlates to the funds required for either retirement or pursuing the next venture. In some cases, there are small changes that an owner can implement that would significantly increase the value of the company. Strategic planning coupled with a proven merger and acquisition process can increase the business value by thousands of dollars.

Traditionally, a business owner does not contact a business brokerage firm until the absolute last minute. In many circumstances, as with the case of divorce or failing health, this is unavoidable and a competent business intermediary firm will be able to assist with a timely valuation and sale of the enterprise. For the majority of cases it is critical to engage a business intermediary early. Professionals involved in the sale of businesses have a variety of titles including, business broker, intermediary, M&A consultant, and investment banker. These professionals are largely performing the same function, selling a business, but typically will differentiate themselves as it relates to the size of the business. The specialized knowledge and experience that a business intermediary has is invaluable in all aspects of the process. Selecting a professional who is experienced in valuations, confidential marketing, qualification of buyers, due diligence, and contract negotiations will be critical to completing a successful transaction. Although the economic challenges over the past two years have caused a dip in the prices of some businesses, there remains considerable interest from a wide range of prospective financial and strategic buyers.

Over the years, I have had the pleasure of meeting some incredibly talented, intelligent, and successful business owners and have a true appreciation for the enormous amount of work, time and sweat equity that has been devoted to building their companies. The majority of these owners were able to maximize the market value of their business through the proactive implementation of a strategic exit plan. Historically, a business owner sells only one business in their lifetime and it is the two or three years prior to the business sale that are the most critical. Ensuring that the proper structure is in place and that the financials are organized in a format which compliments the business enterprise and maximizes the value of the company, is a process that, when adopted early, can offer significant financial benefits upon the sale.

Strategic planning in a business sale provides the ultimate amount of control for the owner and, in most cases, the highest transaction value. Engaging a competent business intermediary who brings an experienced exit planning and transaction team will provide both peace of mind and financial rewards when the ultimate day arrives to sell the business.

The Engineering Business Plan and the Business Model

Separate from a Business Plan is the Business Model. The Business Model is nothing more then a description of the means and methods the firm will employ to earn revenues projected by the Business Plan. The Business Plan describes what the business wants to accomplish and what resources it will use to reach those objectives. The model represents the business as a system of a series of steps (actions) to generate revenue and make a profit. The model includes the components and functions of the business, as well as the revenues it will generate and the expenses it incurs.

The traditional Civil Engineering Business Model is as simple as the engineering company and the customers within a key market like Land Development. The engineering company provides the services that the customer needs and wants, and in return the client pays a fess for those services. Once the engineering company has paid all of its expenses including salaries, the company is left with its profit.

This model although simplistic works well if there is very little or no competition and there is plenty of demand for your services. But rarely is this the situation especially in a declining market. The model in most cases needs to be more robust. One needs to see the “bigger picture.” In order to support the Business Plan the Model needs to address the four main components of the business; Framework, Financial, Client, and the Offer.

Business Framework (Infrastructure):

  • Key Resources – What are the company’s capabilities necessary to make the Business Plan possible?
  • Key Activities – What company activities are necessary to implement the Business Plan?
  • Key Partners – What company partners are motivated to participate in the Business Plan?

Client (Current and Prospective Clients):

  • Segment(s) of Clients – What is (are) the targeted audience for the company’s products and services?
  • Communication and Distribution Channels (Marketing) – What are the means the company will utilize to reach the customer and offer them those products and services? What marketing campaigns will the company utilize to reach its targeted clients?
  • Client Relationship – What are the processes the company will establish to maintain its relationship with the clients?

Business Financial:

  • Revenue Streams – What are the company’s sources that will generate funds to support the Business Plan?
  • Cost Structure – What costs will result from engaging in the Business Plan? What will be the company’s expenses?

Value Proposition (The Offer):

  • What are the company’s products and services being offered to the market?

To sum up the Business Model – The business resources of technical staff and equipment complemented by business partners are able to offer a wide range of products and services with a particular billing rate to potential and existing clients, which are obtained through on-going marketing efforts of the company’s staff with an ultimate goal of presenting a proposal and an agreement between the client and the business to provide certain services and products for revenues.

There are multitude of schematics that are used to represent the Business Model, but they all include the four components; the Business Infrastructure, Financial Strategies, Clients, and the Offer or Proposition. In order to get to the end result, revenues, each of these four components of the Business Model must be operating at the best level of efficiency in order to obtain the most revenues. Failure in any step will either reduce the amount of revenue or completely run your business out of business.

It would be difficult to provide services or products to your clients if the resources necessary were inadequate. Imagine if your firm was contracted to provide a Technical Drainage Study for a 200 acre site, but you were not capable of analyzing a proposed open channel using any of the available commercial software. You then have to sub-contract this work out, hopefully to one of your partner companies, to assist you in this area of expertise. Otherwise, you will not be able to provide the service you were contacted to perform.

The same is true if your firm has all of the necessary engineering design expertise it requires and has also contracted with other sub-consultants to provide surveying services, but you have no marketing expertise. Although there are a number of needy clients in your local market, you have no way of contacting them nor do you even know how to identify your potential clients. The chain is broken because there is no way for you to contract with clients to provide the services you have available. Of course, we you have no clients you have no revenues, and when you have no revenues you have no business.

Even if you have an excellent infrastructure and business partners, and you have a huge pipeline of clients that you obtained through marketing, all will be for not if your proposals do not provide your clients with the necessary services they need at a fair price.

The Engineering Business Model a tool that assists the company to implement the Business Plan. A properly prepared Business Plan and a well designed Business Model will focus your company on the task at hand, which is to obtain contracts and clients and to produce profits. If you have not already done so, now is the time to either put together your first business plan or update an existing one. Once completed, the plan is a resource with a great deal of information. It will make you well of aware of competition, the market, and your company’s capabilities. Updating the plan regularly will keep you well informed on what is happening in your business.

Most engineers have excellent technical skills, but not necessarily the same level of expertise in management. It is responsibility of the engineer to develop these management skills through continuing education. This continuing education can be obtained through Community Colleges, Universities, Professional Training Programs, Professional Organizations, and online training courses. In most states these continuing education courses qualify for continuing education units (CEU) or Professional Development Hours (PDH).