When developing an exit plan, explore the “What Ifs”

Since we can’t predict the future, it is important for the business owner to adopt a “what if” mentality when thinking of exit plans. It is very simple logic. To follow it ask “What if” or “What should I do if ” and then name or state a scenario. Examples: What should I do if my business rapidly expands for five years? What if the economy enters a depression? While the form or wording of the plan is not important, this kind of thinking allows the business owner to cover a wide range of contingencies.

Although it may be useful to list many contingencies, you cannot plan for every contingency that arises. It is more important to select the more important scenarios from the many scenarios thought of. From there create a plan describing the actions and policies to be followed in the event the contingency comes to pass.

Following are the two most important contingencies and should definitely be covered. They are: 1) When should I sell my business? and 2) What should I do if I must sell in an emergency? Examples of an emergency include illness, death, bankruptcy, etc. These two contingencies fall at opposite ends of the logic spectrum. One contingency is on a best-case scenario. The other, potentially a worst-case scenario. Every other plan is in between these two. Without best and worst case scenarios being covered, the plan is probably incomplete. Every exit plan should take into account different factors such as the industry, competition, the owner’s resources and goals, and any other relevant intangibles. The best plans take into account all of the affected persons’ goals.

Now that the scenarios in which to sell a business have been outlined, some homework and basic research must be done. This is important, because it is important to thoroughly know your business and what is in place before you make a plan that may be redundant, ineffective, or void in light of existing agreements. You may want to call in an advisor for legal, accounting, and tax issues that arise so they can interpret them for you. It is probably best to think of potential scenarios and then eliminate them at this stage, because the previous stage defines what is important to YOU, not what is important to EVERYONE ELSE. Doing the process this way will not lead you astray into what others believe is important. The homework consists of reviewing any existing agreements you have with partners, shareholders, and others who are important in the organization. The agreement may consist of articles of incorporation, by-laws, and buy/sell agreements. The exit plan must conform to the existing agreements or it could defeat the plan. If you don’t have any existing agreements between shareholders and partners, now may be the best time to create them in conformity with the plan you want to follow. Remember, a buy/sell agreement is the most important legal document a business can have that covers exit strategies.

After doing the homework, the rest of the plan can be written. The plans do not necessarily have to be complicated or even well written to be effective when the scenarios arise. The most effective plans are the plans that are most thoroughly thought out, so it pays to think at this stage.

• The Goal – It is important to define a goal. Obviously the main goal in any exit plan is to achieve the best results. These results may include reviewing the biggest monetary gain, the smoothest transition into the next generation, paying the least taxes, or to create a retirement plan. The goals in the plan are not as important as the plan itself.
• The Players – Next it is important to choose the players to be involved in the exit plan. Decide what partners or key people will handle what or what you would like them to do. When the time comes, the people named may not be willing to do the task, so be wary of this situation. To prevent an unexpected withdrawal or nonperformance by a team member, these people should be people you have known for a while and are trustworthy. While you don’t have to be an expert on personal character, it is generally best to choose people with interest in conformity to yours, people without incidents of mistrust or fraud in their past, and generally people that anyone would think is trustworthy.
• The Professionals – It is also important to decide who will represent you in your exit. An experienced professional accountant or attorney with a tax background complemented with an understanding of legal implications is probably your best bet here. Valuation of the company is also important. Even though the valuation won’t take place today, it is important to identify a company or professional that has expertise in this specialized area. A poor valuation can lead to selling the business for way too little. An entire lifetime of hard work and sacrifice should not be lost through a shoddy valuation. It would not be fair to you or those around you. Valuation of a company should take place every year, because the results of operation are important. Potential due diligence issues then need to be addressed. Due diligence is the process of ensuring the accuracy and completeness of assertions. It is best to address the issues now rather than wait until the sale. An issue in due diligence can result in a deal breaker.