First, a definition: Exit planning is the comprehensive process business owners use — with help from their professional advisors — to reach all of their goals as (and after) they exit their companies. It includes both estate and succession planning, as well as goal setting, value building and tax planning.
Second, some context: In 2016, my company, Business Enterprise Institute, Inc. (BEI), conducted its second survey of business owners. From over 200 respondents, we learned that 75 percent of all owners would leave today if they had financial security. That was the first surprise. The second was that only 23 percent of owners have spoken to a business attorney — and 17 percent to an estate planning attorney — about their plans to stay in or leave their businesses.
Allow me to suggest two principal reasons for this “failure to communicate” regarding the biggest financial/business transaction of a business owner’s life. First, owners view attorneys and legal work as transactional (i.e., “I need a contract drafted”). So, if they think of planning for their business exits, they call a different advisor — or none at all. Second, rarely do lawyers initiate discussions concerning their clients’ thoughts about exiting their companies. I wonder why we are surprised when we discover that our clients have begun to transfer or sell their businesses without contacting us.
The Transition from Transactional to Trusted Advisor
How can you pivot from a highly skilled specialist to a trusted advisor who, over the course of years, helps clients achieve their most important objectives?
I suggest that you use a process that CPAs, CFPs, valuation experts, business consultants, M&A intermediaries and yes, many attorneys use every day: exit planning. To help make my argument, I asked James R. Carlisle II, a successful M&A attorney and partner in the national firm of Dinsmore & Shohl LLP, why he added exit planning to his toolbox.
“In the all-too-common scenario, a client would call, tell me about an unsolicited offer and ask me to prepare the transaction documents necessary to close the transaction. My team responded, but critical business decisions had already been made and, because the company had not been prepared for sale prior to the offer buyers, after discovering issues during due diligence, would chip away at the purchase price. Almost inevitably, my clients walked away from the closing with less cash than they anticipated due to the lack of preparation, the tax consequences related thereto and the deal structure. I knew that both my clients and I could do better.”
Carlisle completed the training necessary to become a Certified Exit Planner and today incorporates exit planning into his practice. What has changed? “Exit planning permits me to proactively plan with my clients for years before the exit transaction so they benefit in very concrete ways. Personally, exit planning is a more satisfying use of my talents and abilities to help owners achieve their objectives. Professionally, my practice is more interesting, the work more enjoyable and my clients more appreciative. This dynamic invigorates me to practice law for as long as my health permits.”
The Attorney’s Role in Exit Planning
The planning and execution of an owner’s business exit plan require substantial legal, accounting, tax, consulting and other professional services and products. To review a list of the legal work required in each of the steps in the Seven-Step Exit Planning Process, I suggest you refer to The Role of the Attorney in the Exit Planning Process.
The following overview of the process focuses instead on the role of the lawyer as an exit planning advisor, a role that Carlisle has assumed.
BEI’s Seven-Step Exit Planning Process
Step 1. Help Set An Owner’s Exit Goals
Exit planning is “owner-centric” not “advisor-centric,” meaning that the entire process is organized to achieve the owner’s exit goals and aspirations. To begin to uncover these goals, exit planners ask three questions:
- When do you want to exit your business and what does “exit” mean to you?
- How much income will you need or want for the rest of your (and your spouse’s) life after you exit your business?
- To whom do you wish to transfer your business?
Carlisle leverages this step to learn “everything” about his clients’ businesses. He explains, “By investing time in in learning about our clients’ objectives, their businesses and their people, we flip the traditional lawyer/client relationship: We no longer simply accept orders for work; instead, we participate in discussions about alternatives and only then proceed with work.”
Step 2. Quantify Resources
An exit plan requires accurate knowledge of:
- Business value;
- Projected cash flow of the business;
- The amount and income from the owner’s non-business investments; and
- The amount of the gap, if any, between existing resources and the resources needed to achieve all of the owner’s goals and aspirations.
If quantifying resources doesn’t seem like the practice of law, you’re right. It isn’t. But before we perform any professional work, we have to know where owners want to go and what type of vehicle will take them there. Without that information, be careful: “If you don’t know where you are going, you might not get there.” (Thanks, Mr. Yogi Berra.)
Step 3. Grow business value and cash flow, reduce business risk, minimize income taxes
Exit planning-oriented attorneys no longer view their representation in terms of isolated transactions (e.g., preparing employment agreements, negotiating new leases, etc.). Instead, all of the work you do to grow the business, reducing its risk or minimize its taxes is oriented to achieving the owner’s goals.
Step 4. Sell the business to an outside party
If an owner wants to sell to a third party, is exit planning necessary? M&A attorneys who incorporate exit planning into their practice understand, before beginning the sale process, precisely what their clients want and need and ensure that both the business and the owner are prepared and ready for the rigors of the sale process.
Step 5. Transfer the business to children or key employees
About two-thirds of the exit plans that BEI members create contemplate transfers of ownership to management, key employees or family. Seldom do these buyers have sufficient funds to purchase a business or obtain financing to purchase the owner’s business. Therefore, transfers require considerable planning and time to sell increments of business ownership to the “insiders” who meet specified performance standards that continually increase company cash flow. An exit plan is the written road map that describes not only the owners’ goals and resources but also what must be done at each step, by when and by which advisor. Nowhere is such a plan more essential than in designing and executing a multi-year ownership transition to children or management.
Steps 6 and 7. Business Continuity and Estate Planning
The final two steps in the process deal with business continuity and estate planning for business owners and their families. The premise for both is that owners typically want to achieve their goals whether or not they survive until their planned exit dates. Engaging in exit planning is the foundation for both well designed business continuity and estate plans for business owners. Only through exit planning do we gain the understanding necessary to make certain that the owners’ lifetime goals are achieved — whether they live or not.
If these personal benefits of exit planning don’t intrigue you, consider the following:
- Differentiation in the marketplace;
- New revenue generation from existing clients; and
- Development of deeper and durable relationships with clients as well as other advisors.
Then you decide: Are you ready to add exit planning to your resume? D
John H. Brown, now an inactive attorney, co-founded and exited the Denver law firm of Minor & Brown, P.C. He subsequently founded Business Enterprise Institute, Inc. to train advisors from all professional disciplines to help owners plan and achieve successful exits from their businesses. Brown is the author of several books, numerous articles and posts on Forbes.com on the topic of exit planning. He can be reached at email@example.com.
Thanks to James R. Carlisle II, a partner in the law firm of Dinsmore & Shohl LLP and chair of the firm’s Growth & Exit Planning Practice Group. If you’d like to learn more about his experience with exit planning, he can be reached at firstname.lastname@example.org.