By Jim Ward and Rusty Kruciak
As advisors to privately held businesses, we are often approached by our clients when change is imminent. Some business owners are compelled to act because of unforeseen circumstances, while others are seeking guidance for navigating the transition of their businesses. Regardless of the circumstances, we encourage our clients to prepare for the unexpected before it happens by exit planning.
So what is exit planning? Exit planning is an active process to help owners maximize and harvest the economic value of their business and transition that value when the owner is ready to start the next chapter of life.
In order to understand the value of exit planning, it is important to understand why the concept of exit planning is experiencing a resurgence. Often, up to 80 to 90 percent of an owner’s liquid wealth is tied up in a privately held business. Most business owners do some planning — including wealth and estate planning, or some liquidity and tax planning. They typically build those plans, however, with professionals who never collaborate with one another. That’s where exit planning comes in.
Exit planning is designed to coordinate activities among multiple key advisors to execute a master plan that serves the combined interests of the business and its owner. If the exit plan is well-thought-out and implemented skillfully, it will enable the exiting party to reduce or delay total taxes payable, maximize valuation and cash proceeds at closing, allow for smooth operational and management transitions and provide a road-map for the next phase of life — all governed by the timing and terms of the owner. For owners who wish to retain the business for a period of time following the process, exit planning will provide the basis for active, strategic management of the business that is attractive for investment and/or market consideration when the time is right.
How do we know? 2nd Generation Capital was formed in 1994 to help our clients address these challenges. We believe we are uniquely qualified for the role of exit planning coordinator for several key reasons:
- Our members include a professional who is credentialed as a Certified Exit Planning Advisor (CEPA) with the Exit Planning Institute (EPI).
- Our members, who are credentialed as Certified Valuation Analysts (CVA) with the National Association of Certified Valuators and Analysts (NACVA), perform complex business valuations related to exits, stock ownership plans, partnerships, family mediation and litigation.
- Our subsidiary, 2nd Generation Financial, is a FINRA-regulated broker-dealer, and our members are licensed as investment bankers.
- We have started, managed and successfully exited businesses ourselves.
- We frequently act as advisors for family-run companies during succession implementations including: generational transfers, MBO, ESOPs, sale to a third party, and liquidations.
- Our unique affiliation with KraftCPAs allows us to operate as a lean organization. This relationship with Kraft also means our clients are always served by a principal with direct access to tax, wealth management and accounting services.
Introducing The Kraft Advantage Exit Planning Corner
At this point, you probably have a lot of questions about exit planning. That’s why we are proud to introduce a new series in The Kraft Advantage — The Exit Planning Corner. Beginning with the spring 2017 edition, the Exit Planning Corner will address each component of the exit planning process. Our intent is to highlight the specific elements involved as well as to offer a list of thoughts and questions you can use to evaluate where you might be in the exit planning process. Here is a preview of topics:
- How to identify your exit planning team to ensure a coordinated alliance of key advisors
- The process elements: What are they and how do the pieces fit together with the overall plan?
- de-risking, active planning, implementation and follow-on reviews
- Identifying and planning to specific goals. These will include:
- value maximization, contingency planning, operational stability, life planning and education
- Timeline — What you, the business owner, can expect (deliverables) and how long the process will take
- The role of the exit planning coordinator — what to expect and why they matter
We recognize that owners are often focused on the daily operation of their business and view situations, like the ones mentioned here, as important, but not urgent matters. Perhaps you are unsure of the benefit of exit planning, or the process appears to be too burdensome to deal with right now. In any case, we encourage you to follow the topics discussed in the Exit Planning Corner of The Kraft Advantage and to reach out to us with your questions. We will be happy to show you how exit planning can help prepare you and your family for what’s next in life!
The Kraft Advantage is a quarterly, print magazine produced by KraftCPAs. It includes a variety of informational articles on topics related to business and personal financial management. If you do not currently receive The Kraft Advantage and would like to subscribe to this free publication, please provide your contact information on our sign up form.