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Writer's pictureJohn G. Gatewood, CFP®, CLU®

Exit Planning

Updated: Aug 20, 2021


You are accustomed to CIO Aaron Tuttle and me speaking on our views of the economy and financial markets every week. However, I had a chance to interview Larry Weiss, a CPA® and a Certified Exit Planning Advisor (CEPA), to discuss how a business owner should consider their exit plan.


Here are his insights on what it means to sell a business, both as the seller and the buyer.


Exit Planning is Critical for Business Owners

One of the more significant parts of exit planning is the life after the plan. Larry takes all of his experience to teach and help privately owned businesses grow, exit, and win. An exit plan asks and answers all the company, personal, financial, legal, and tax questions involved in transitioning a privately owned business.


Baby boomers own the majority of all businesses. Larry says, "a large portion of those owners will eventually transisition in the near future."


He found that nearly all business owners don't have a formal plan. Most of the time, they haven't put together a team to help them with it. From his experience, Larry stated, "nearly all business owners regret selling their business a year later. They don't regret the price, they regret what happened after the exit, and they just weren't prepared for it. They went from being the big fish in their pond not even to feel like they had a fishbowl to hang out in."


Business Owners Fail at Transitioning their Businesses

Often business owners believe they should define a plan right before they are ready to sell; however, the reality of exit planning is that it is more about business strategy. Therefore, your team must know the businesses' needs and wants long before you think about exiting your business. If they don't understand those, how will they help create a successful business exit?


Once you can understand the owner's needs and wants, you will need to know what they want to do in the next chapter. As a business owner, you should know and manage your three gaps to meet your goals.


1. Profit Gap

  • The profit you are sacrificing by not operating at a best-in-class level.

2. Value Gap

  • The business value you are sacrificing by not operating at a best-in-class level.

3. Wealth Gap

  • The additional wealth you need to accumulate to meet your goal

These gaps are crucial to why you want to start the exit planning process early. For example, if you need the business to be worth $10 million, so you can net $7-6 million, you must define a plan to increase your business's value.


Larry also suggested to grow your clients business to the top line; you should follow the 4 C's:


1. Human Capital

  • Value of talent (your team) that you have in your company

2. Customer Capital

  • A measure of the strength of relationships with your clients

3. Social Capital

  • How you move information within your company; the culture

4. Structural Captial

  • The company's systems and processes

Types of Exit Plans

Two significant categories exist when talking about an exit plan. You either have internal, or you have external. Internal means it will be intergenerational, such as somebody within the business familiar with it (child, co-worker, partner). However, external is quite varied. It could be a strategic, outside buyer in one company, a few companies in different industries coming together to form a new company, an employee stock option plan, or a financial buyer.


GWS suggests to business owners early enough in the business cycle to set some profits aside to a diversified investment account. The more a business owner has outside the business, the more options they have later.


Business Owner Transactions

The type of transactions that business owners will look to is stock sales vs. asset sales and income transaction vs. capital transaction. Understanding the options and knowing what's selling the business isn't as important as what you get from your company. So, part of the process, and one of the reasons you should start early, is to become better informed. Therefore, one of the values of working with an exit planner is they can help educate business owners through all types of issues.


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Disclosures:


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.


All indices are unmanaged and may not be invested directly. The economic forecasts outlined in this material may not develop as predicted, and there can be no guarantee that the strategies promoted will be successful.


All investing involves risk, including the possible loss of principal. No strategy assures success or protects against loss.


Securities and advisory services are offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.


Larry Weiss and Weiss Advisors is not affiliated with or endorsed by LPL Financial and Gatewood Wealth Solutions.

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