Exit Planning Timeline: Does it Really Take 5 Years?
Traditionally, experts suggest allowing five years for exit planning. I think that’s misleading.
The issue is that “planning” isn’t what prevents an owner from exiting: its value. In nearly every case, an owner believes their company is worth more than it is, and they need it to be worth more to fund their retirement when they sell.
So, “planning” itself doesn’t take five years. The planning part of the exit process will likely take about 18 months. What takes five years is deliberately growing the company’s value to reach its target number.
To get a deep insight into the steps in exit planning, you must understand the timeline.
Exit Planning Steps
The exit planning process can be broken into three distinct steps or phases:
- Exit plan creation (the planning phase)
- Implementation of the exit plan (the value creation phase)
- Transfer of ownership at the time of the business owner’s exit.
Creating the Exit Plan (Planning Phase)
The first step, also called the planning phase, involves clearly defining and writing down the business owner’s exit goals: their needs, wants, and expectations from selling the company. One essential purpose of exit planning is to minimize or avoid taxes, so advisors develop ideas and formulate strategies to achieve them.
Exit planning advisors try to understand the purpose of the exit to devise the right exit plan. They calculate the business’ current value or how much the business owner could reasonably expect to get by selling the company today. This exercise is crucial in determining the baseline value (the starting point) of the business.
The baseline value helps identify the gap between what the business owner could get today and what they want to get upon exit. Exit planning advisors conduct various analyses to check if the entrepreneur’s exit goals are viable and feasible, given the resources available.
They identify the company’s strengths and weaknesses by weighing them objectively and considering different exit paths. Advisors analyze what issues are likely to arise when trying to exit and how to resolve them. They assign management team members or key employees to particular value creation initiatives. They have a clear plan on how they will close the value gap within a pre-determined period.
The timeline for this first step to create the exit plan can take up to 18 months. Business owners usually take time to decide their exit goals and choosing the right exit path. After the initial business valuation and establishing of the baseline value, it takes time for the business owner to come to terms with the actual current value of the business because they usually have an inflated idea about its worth.
Exit Plan Implementation (Value Creation Phase)
Exit plan implementation, also called the value creation phase, is often the most time-consuming step in exit planning. No matter how well the exit plan is, implement different initiatives and get the desired results. The timeline also depends on the number and severity of the issues the business must resolve. That may take months or even years.
Both the advisory team and the management team need to focus on the plan and work as partners. They must be on the same page and be accountable for their tasks in the exit planning process. This includes periodically checking their progress against the exit plan and re-assessing goals and deadlines.
The value creation phase usually takes up to five years.
Transfer of Ownership at the Time of the Business Owner’s Exit
A business owner can exit differently: an installment sale to an employee, succession to family members, M&A, etc. Depending on the type of exit, the timeline may differ.
Installment Sale to an Employee
When transferring business ownership to an employee via an installment sale, the business owner may look at their exit as a process instead of a one-time event. They can transition significant areas, one by one, with a comfortable period in between so that the business exit is smooth for everyone involved.
One of the crucial drawbacks of selling to an employee is a lack of cash readiness to settle the purchase price in one go. Therefore, you can offer a convenient installment sale option while also transferring the business in installments.
Business owners may also transition their business over time by selling, gifting, or giving bonus shares annually in small quantities. The owner maintains control of the company by holding over 50 percent of the voting shares during the initial transfer. When the owner is ready to transfer power entirely, the buyers are prepared, too.
This process is a successful way to transition the business to insiders but requires proper financial planning and is time-consuming.
Succession to Family Members
One way to transfer business ownership to family members is through stock redemption. Suppose the business owner owns 80 percent of shares and his two children equally own the remaining 20 percent. The business owner can sell his interest to the company when the company buys the 80 percent share, the stake of the remaining shareholder’s increases. (In this scenario, the children now become 50-50 shareholders).
M&A Business Transition
When aiming for a business transition to a third party via a merger and acquisition (M&A) deal, the process may involve the following phases:
- Determining the right strategy to go to the market
- Attracting multiple buyers
- Selecting the best-suited transaction structure
- Preparing the business for the exit with ready information that the prospective buyers may request
- Initiating talks with the potential buyer and getting the non-disclosure agreement and memorandum of interest signed
- Moving to the letter of intent phase and laying down the key parameters of the M&A deal
- Going through the due diligence and negotiation phases.
This complex and lengthy process may take up to six months.
Factors That Influence the Timeline for the Exit Planning Process
Exit Readiness: The Business Owner
Does the business owner have a clear idea of the business goals and the tentative time of exit? Is the business owner even mentally prepared for the exit? If not, the exit process takes longer.
Exit Readiness: The Business
Is the business itself prepared for the owner’s exit? Will it survive without the ownerâ€™s involvement? Does the business have a succession plan? How much effort is the business owner ready to put in to make the business exit ready? The answer to these questions will give an idea of the timeline for the exit planning process.
Access to Important Data
Does the business have error-free, objective accounting standards and procedures? Is all the relevant information required to begin the exit planning process readily available? If not, gathering the required information will consume more time.
Presence of a Strong Management Team
If the business depends on the business owner, it will take extra time to build a reliable management team to see the company through the transition process.
Number and Severity of Issues
The timeline for the value creation phase (the longest phase in the entire exit planning process) depends on the number and the severity of the issues that the business must resolve before going to market. A company having critical problems takes longer to exit.
Exit Path Type
The type of exit paths, such as family succession, installment sale, or M&A deal, influences the timeframe for the actual exit.
The Best Results Take Time
If business owners allow circumstances to force their exit, they can exit within a year. However, that exit will not give them the outcome which they would otherwise want. With a planned exit, they can meet their post-exit needs and wants. So, if they want their business exit to deliver the desired results, they need to work with advisors throughout the entire exit planning process.
Remember, there is no one-size-fits-all solution when exiting a unique business.