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The 7-step process is flexible and dynamic. The steps do not necessarily have to be addressed in the following sequence, and more than one may be in progress at a given time.

 

The Foundation: Establish Goals and Quantify Resources

.Step 1: Business Owner Establishes Exit Goals

• Departure Date: the date on which owner wants to leave the business (anything from an immediate departure to an "until death do us part" plan).

• Financial Goal: the amount of cash the owner needs, at the time of departure, to support the desired post-business lifestyle for the rest of the owner's (and spouse's) life.

• Successor(s): Owner's choice(s) for successor owners and managers, i.e., child, key employee, or outside buyer.

 

Step 2: Business and Personal Financial Resources and Gap Analysis

• Quantify business and personal assets.

• Determine whether or not assets are sufficient to satisfy the owner's financial goal.

• If there is a gap, it must be filled through growth in business value and cash flow for the owner to exit on own terms (established in Step 1).

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The Straws that Stir the Drink: Business Cash Flow and Value

Step 3: Maximizing and Protecting Business Value

• Focus on business characteristics that have been proven to contribute to the growth and preservation of business value ("Value Drivers"), such as:

  • Stable, motivated management team;

  • Solid, diversified customer/client base;

  • Realistic growth strategy;

  • Operating systems that improve sustainability of cash flows;

  • Good and improving cash flow;

  • Effective financial controls.

• Value Drivers are particularly important when business value is insufficient to fill a gap between (i) the amount an owner needs for desired post-business lifestyle (established in Step 1), and (ii) the value of the owner's other assets.

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The Main Event

Step 4: Ownership Transfers to Third Parties

• Determine if the business is likely to attract third-party buyers.

• Prepare the owner for the sale process, e.g. letter of intent, non-disclosure agreement, due diligence, negotiations, anticipated professional fees, and other costs.

• Prepare the business for sale.

• Work with investment banker, intermediary, or business broker; employing "controlled auction" strategy, if possible.

• Work with owner's professional advisors to structure the sale transaction, including tax, business, and personal goals and issues.

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Step 5: Ownership Transfers to Insiders

• Fundamental Challenge: Typically, an owner's children, co-owners, or key employees (collectively "insiders") don't have, and cannot borrow, much money.

• Planning for an insider transfer takes time and works best when the owner stays with the company for several years, allowing time to:

  • Accumulate the necessary cash through Value Driver Planning and other business strategies;

  • Deploy tax minimization strategies for the owner, as well as the purchasing insiders, to enable them to pay the owner in a manner that they - and the business - can afford;

  • Transfer management responsibility in an orderly fashion so that successors are ready to step into their new roles

  • Minimize risk by ensuring that owner maintains control until financial goal is met.

 

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Preserving the Legacy

Step 6: Business Continuity

• Here, we seek to protect the owner and successor(s) in the event that the planned transition is derailed by the death or disability of the owner or successor(s).

• Tools can include:

  • Written continuity instructions (to include designating individuals to assume specified authority and responsibility);

  • Buy-sell agreement;

  • Life disability, and key person insurance;

  • Arrangements with banks regarding personal guaranties and continuing credit; and

  • "Stay Bonuses" for key employees so that they will remain with the business for a specified time following the owner's death or disability.
     

Step 7: Personal Wealth and Estate Planning

• The business usually represents the greatest portion of the owner's net worth and income.

• Personal wealth and estate planning:

  • Provides financial, legal, tax, and asset protection benefits;

  • Focuses on protecting personal assets and managing wealth for the present, the future, and upon death;

  • Considers personal goals and values, including family harmony and fairness to all children.