I was meeting a client in the southeast, so I made contact with another owner in the same city who had reached out to me before. He responded to my email saying that he was not in any hurry to plan his exit since he “was not going to leave any time soon.”
His response revealed that he did not understand his exposure to increased risk for higher taxes, the possibility of not meeting his financial objectives and of running out of money in retirement, and the potential of overall failure to meet his objectives due to lack of planning.
I truly understand this predicament because my past company’s team of owners invested six years and more than $250,000 for fragmented advice and offerings as we wandered down the exit path with two offers from industry roll-ups that were consolidating our space and two offers from boutique private equity firms that wanted to invest in our company.
Additionally, we investigated an employee stock ownership program and ultimately used a management buyout to transfer the stock of three owners to five new owners. This process wasted a lot of time, energy and money because we reacted without clearly defined plans and goals.
Back then we did not have exit planners, so we received fragmented information on each option from well-meaning advisers, including transactional advisers (biased), attorneys, accountants, insurance advisers, estate planners, financial planners and others. In the end we did exit our business, but I later realized that because we followed the traditional path recommended by our advisers, we significantly overpaid in taxes. After my education and certification in exit planning, I realized that good planning could have saved us millions on the transaction. Ouch!
I thought my answer to the owner who “did not intend to leave anytime soon” would make an interesting article; it went pretty much like the email below (with minor edits to protect his confidentially):
Time is your best friend when exiting your business. Planning is about managing your risk and having a strategy that supports your exiting motives and goals. Many owners who have never exited their business must understand that they have to overcome their emotions, support their financial plan and minimize the financial risk that goes along with transferring a business.
The exit (getting your money without being clobbered by taxes) & succession (replacing the empty chairs) are two different disciplines. Bottom line is the process takes time and you need a measurable plan because of all of the different moving parts.
The exit plan process simply works like this. First, we spend a lot of time interviewing you as a means to understanding you goals; figure out your individual and family challenges; and then follow a process with a plan to meet your personal, business and financial goals to get out of the business in the most tax-efficient manner and to protect what you have earned.
Getting out efficiently (taxes) may require that you restructure your company, implement the use of other entities or trusts, or just take some time and manage the financial risk associated with transferring the business.
In your case, there are several other satellite companies with minority interest that need to be untangled and monetized. This requires a calculated legal and tax strategy. There may be opportunities to effectively utilize existing deductions, losses and credits for a tax efficient transfer. Without utilizing the appropriate resources, the owners’ goals may never come to fruition.
Saving inside the business can allow Uncle Sam to help finance your retirement. It’s complicated, but we have demonstrated from $1 million to $6 million in savings that owners would have forfeited to unnecessary taxes or lost value.
I believe you have the succession part in focus with your children and management aligned in your head. This process is about getting the team on the same page, stretching them into professional performance and then, most importantly, into leadership. The process is critical for the future viability of a sustainable business but also requires a lot of soft and hard skills.
But again, this is a measurable plan to get you to your goals and on track for leaving in 10 to 15 years or more and hopefully not tomorrow. Beacon has several tools and processes to help you if you are interested.
You probably are entering into the largest financial event of your life to harvest the wealth trapped in your business. You want the best information to minimize the risk, make the correct decision, and understand your financial and strategic control issues to replace your income. This process protects your hard-earned wealth and legacy.
Is this making sense? It is a lot to explain in an email. My style is to not bug you but to educate owners with my newsletters, articles, presentations, and one- and two-day workshops. I made contact with you because we were already in your city and I was making myself available.
I hope this helps you understand how the process works. Even though you do not intend to leave anytime soon, you simply need the time and a strategy that may take many years to implement.
Looking back, I think this email relates to most business owners who are stuck in their business and cannot see the importance of planning and creating a strategy to exit. My message here is that time is your best friend. Use it to your advantage.