Exiting your privately owned business can be a very emotional, intimidating and taxing proposition. This complex process requires input from your accountant, tax adviser, attorney, business appraiser, estate planner, financial adviser and insurance adviser, among others. Coordinating and understanding the disjointed advice can be overwhelming. Our job as exit planners is to design a customized blueprint for your exit, while coordinating all the moving parts associated with transferring the business.

Certified Exit Planners are specialists in this process. Their role is analogous to that of an architect. Picture the duties of an architect. They understand and design every part of a building but don’t necessarily have the capability to install a furnace. They design, specify and create a blueprint that coordinates the building process.

The exit planner works in a similar holistic fashion. They design the exit plan, creating a blueprint for the business owners and their advisors as a way to understand and coordinate the various disciplines in the exit process in order to meet the owner’s goals and reduce the tax impact. The exit planner does not write the legal documents, recommend investments or prepare estate planning documents. They are designers and process consultants.

Business owners intuitively understand and manage their everyday risks in a measurable manner. But most owners have never exited a business and are unaware that the odds are against them. My experience as a business owner who bought and then sold a 200-employee business has helped me understand firsthand the complexities that come with selling and transferring a business. This article will highlight several concerns to open your mind when it comes to a business exit.

Beacon has observed these seven recurring problems in its experience advising owners from coast to coast. These are minefields that can derail owners from successfully achieving their inevitable exit.

1. Outliving Your Money

2. Odds of Selling to a Consolidator or Competitor

3. Odds of Selling Company to Management or Family

4. Taxes of Zero to 55 percent Plus

5. Predators

6. Buy-Sell Agreements

7. Primary Cause of a Business Exit Failure


1. Outlive Your Money

What is the number one fear is for affluent Americans? Surprisingly, it is not public speaking or even death, which used to be the biggest fear.

Now for those over 55 the greatest fear is running out of money in retirement, according to the results of Bank of America’s latest Merrill Edge Report released in May 2014.

Most business owners are considered affluent. Their business pays them generously, supports their lifestyle, travel, autos and entertainment. Industry studies shows that their largest segment of wealth is trapped in their illiquid business, which amounts, in our experience, to more than 70 percent.

So the owner’s challenge is how to live independently from the business, cash out without being clobbered by taxes, retire and not outlive their money. Welcome to the world of exit planning.


2. Odds of Selling to a Consolidator or Competitor

According to the U.S. Chamber of Commerce, fewer than 20 percent of the companies brought to market actually sell. According to FMI, this figure is closer to 10 percent with construction companies.

I could write a white paper on increasing the odds of a successful external sale, so please take this simple advice:

  • Do not wait until a buyer approaches you on a “one on one” negotiation. Once it is “sale ready,” plan to market your business to several competitive bids, which may increase your odds for achieving the highest price and financial independence from the business.
  • Find an experienced and proven mergers and acquisition (M&A) professional and get the company “sale ready” in order to receive the highest possible price.
  • Determine early what price you need and the after-tax net of the sale in order to maintain your post-exit lifestyle.
  • Get a certified valuation adviser to determine the actual “synergy value” so you have a realistic understanding of your company’s justifiable value going into the negotiation.


3. Odds of Selling Company to Management or Family

Fewer than 30 percent of family businesses will transfer to the second generation, and only 10 percent will transfer to the third generation, according to Family Firm Institute.

Another way of saying this is that 70 percent of family businesses will fail to transfer to the second generation and 90 percent will fail to transfer to the third generation. So if you were the founder of your business, your grandchildren would have about a 3 percent chance of taking the company into the third generation.

The vast majority of private business sales in the lower to mid-level markets ($5 to $60 MM) will be an internal sale, transferring via an ESOP (Employee Stock Ownership Plan), an MBO (Management Buy Out) and through gifting. The good news is, if the internal sale is structured properly, the after-tax results can often exceed an external sale.

When I exited, our team bought the company from a second-generation family owner in 1995. We were a non-family third generation group who successfully sold to our fourth generation management team in 2003. Our team focused on systems, execution, culture, accountability and then moving the future team into leadership and ownership, which is the behavioral succession piece.

Next time, we’ll conclude this discussion in Part 2. Stay tuned.