Embracing Private Business Owner Exit Planning: The Time is Now

By Laura S. Leopardi, CPA, ABV, CFF, CGMA, CEPA, MBA

According to the Exit Planning Institute’s (EPI) premier issue of its Annual Exit magazine, published earlier this year, “75% of business owners would like to exit their businesses within the next 10 years … and it’s personal.” Arizona Society of CPAs members may be well aware from conversations with their clients that baby boomer private business owners have built their legacies, funded their lifestyles, employed their families and supported their communities, but now they are becoming increasingly ready for their “next act.”  

Whether the topic arises naturally in client conversations, or you are forced to discuss it due to what EPI refers to as the “Five D’s” – death, disability, divorce, disagreement, or distress, welcome to the business owner exit planning space. Here are just a few astonishing exit planning industry statistics, reported by EPI: 

• Generational wealth transfers in the next decade are estimated to be a $14 trillion opportunity.
• Only 30% of business owners have an updated estate plan.
• Only 24% of business owners have a will.

What About the End Game? 

Harvard Business Review states that the M&A failure rate is between 70% and 90%. Accordingly, business owner exit planning should be a current state of mind to avoid business liquidations to pay estate taxes or unwanted takeovers by opportunistic buyers. Both of these circumstances unnecessarily leave chips on the table.

EPI refers to its three-pronged approach of business, personal and financial as the “three legs of the stool” when it comes to business owner exit planning. To be saleable, businesses must be both attractive and ready. The attractiveness of a business refers to how attractive a business is to a third party outside the business. The readiness of a business refers to whether or not value has been created that is actually transferable. The business owner’s personal readiness to exit refers to how satisfied they will be in their next act and what that looks like.

The business owner’s personal readiness is the most important element to address to ensure a successful exit. Does the business owner have purposeful personal goals and plans? Are they written down? Have those goals and plans been shared with family members? Many business owners think it’s time to leave their business now, and they may even verbalize it. The reality is that a business owner’s identity, sense of purpose and stature in the community can be quite tied to the business. This fact contributes greatly to deal failure rates caused by owners ultimately deciding not to sell or leaving them dissatisfied upon an eventual exit (seller’s remorse).

Selling a business is most likely the largest transaction they will ever complete. A business owner’s personal financial readiness refers to whether their accumulated wealth will be able to actually fund their next act. I refer to this as “Can you afford yourself?” Will the exiting business owner be able to afford their lifelong dreams of world travel, to leave a legacy through charitable giving, or to continue to maintain multiple residences and expensive hobbies?

The attractiveness and readiness of the business, the personal psychological readiness and the personal financial readiness of the owner dictate what exit options are viable. Exit options are considered internal or external and may involve a combination.

Internal Exit Options  

1. A family business dependent upon its founder, having only a few customers and with limited infrastructure may only be transferable over time to a family member working in the business or interested in doing so.
2. An established business with tenured C-suite executives who are interested in taking over the business from its founder describes a potential management buyout exit option.
3. Employee Stock Ownership Plans (ESOPs) are a cultural tool used to reward employees with ownership over time, provide the selling owner(s) liquidity over time and can provide significant tax benefits allowable by the Internal Revenue Code. It is important that a business owner has a thorough understanding of the many nuances of ESOP transactions which can be accomplished through a feasibility analysis. These include:
   • Characteristics that make a company a good candidate for an ESOP transaction.
   • Compliance requirements.
   • Parties involved before, during and after the ESOP transaction.
   • Transaction costs, ongoing costs and income tax impact.

External Exit Options 

1. An established business challenged to fund aggressive growth or that lacks adequate infrastructure from not having scaled its processes may seek capital – financial and human capital, from outside investors.
2. Private equity (PE) firms and family offices seek business investment opportunities for their portfolio holdings. These buyers are capable of infusing both financial and human capital to create transferable value. Some PE firms and family offices have and maintain a buy and hold investment portfolio strategy enabling exiting business owners to leave their companies more intact. This differs from firms with a five- to seven-year timeframe to aggressively grow and flip their portfolio holdings as required by their investment mandates.
3. An established business’ competitor who seeks market share to increase its footprint in an industry is a prime example of a third-party strategic buyer.

In addition to the state of the business itself, the viability of selling a business is dependent upon economic and market conditions – inflation, interest rates, available financing sources, current or pending laws and regulations, etc.

Business owner exit planning typically involves an iterative approach to achieve a valuable, transferable entity, a ready and willing selling business owner, and sufficient liquidity to meet the exiting business owner’s goals and plans. The good news is that there is a plethora of experienced and credentialed professionals working in the multi-disciplined private business owner exit planning space today who are both passionate and dedicated to assisting in business valuation, business attractiveness and readiness assessment, business owner personal and financial readiness, business value creation, and assessing appropriate and viable exit options. The timeliness and thoroughness of private business owner exit planning increases the probability of successful generational wealth transfers and satisfied sellers ready to take on their next act.

Laura Leopardi is a champion member of the ASCPA and founder of Leopardi Valuation. Her professional practice of 23 years serves private business owners and their professional advisors in matters including private business valuation and owner exit planning, strategic, succession and estate planning, shareholder transactions and financial due diligence. Leopardi may be reached at lleopardi@leopardivaluation.com.