One way or another, we’ll all exit our businesses. Even for those who never plan to retire, disability or death will eventually cause their exit. Exit planning is about building value, mitigating risk, and developing alternatives; it’s about acknowledging God’s ownership of the business and seeking to discern His will for His resource.
General Dwight Eisenhower planned the largest amphibious assault in history—the Normandy Invasion. Eisenhower was not foolish about his ability to predict just how the invasion would go. He knew there was much he could neither predict nor control. And yet he said, “Plans are nothing; planning is everything.”
In a similar way, our exit from our businesses may not happen as planned, but the process of thoughtful planning is extraordinarily valuable. Good exit planning occurs years, even decades, before an exit is likely.
Four Big Picture Possible Exit Scenarios
Patrick Ungashick, a partner at White Horse Advisors, an exit planning firm, writes in his book, Dance in the End Zone, that there are four ways owners exit their businesses.
- Outie: You sell your business and leave it behind. This is the classic Wall Street exit: sell to a strategic or financial buyer and go on to something else. This typically creates a lot of margin in one’s life and perhaps even boredom if it’s not prayed through and planned for.
- Innie: You sell the business but remain in a meaningful role. This often happens when the value of the business is closely associated with your personal involvement and performance. An IPO is an Innie exit. You may become wealthy but still have a large financial stake in the company and a significant operating role.
- Passer: You pass the business to another generation of management. This may occur in family businesses, in partnerships like law firms which allow a younger generation to buy out the retiring generation, or through an employee stock ownership program (ESOP).
- Squeezer: The focus here is on squeezing the last value from the business and then closing down. Many small businesses will be Squeezers if there’s not ongoing intellectual capital or transferable customer relationships.
These exit scenarios identify the most likely owner who will follow your stewardship of your business. As you develop your scenario, it will be very helpful to identify who your next owner may be.
What’s Your End Zone?
Do you know how much money you’ll need to provide for your retirement, your family, and other post-business pursuits? How much is “enough” for you? There’s a ditch on both sides of the road. On one hand, we can be poor stewards of the productive engine God’s given us stewardship over. On the other hand, we can focus too much on a desire for wealthy independence so that we don’t have to rely on God. Knowing your end zone can be freeing as you can release excess to other purposes.
Many leaders approach the business planning process by defining expected revenue and costs. How would the process be transformed if you began with what creates long-term value and focused on how to improve in that area? Sometimes, long-term value is created by intellectual property, specialized assets, strong executive management, a high-integrity/high-performance culture, recurring revenue, a loyal and financially stable customer base, cash flows, a unique pool of qualified employees, or a powerful brand. What would create value in your preferred exit scenario?
Who will own and manage the company when you no longer do? The first principle is to separate ownership and management. Second, identify the right leadership for the company, both now and in the future. Particularly when there’s a long time before your desired exit, there’s a lot of uncertainty in planning for future leadership. You want to be sure that you’ve put mechanisms in place that will retain key employees who make the operations excel.
If there are multiple owners in your business, you need to have thought through your exit plan in the context of all the owners, not just yourself. Depending on the situation, you may need to transfer your ownership to them, buy one or more of the other owners out, or have a shareholder agreement that adequately provides for the contingencies that might arise between now and your exit.
Far too often, taxes become a serious consideration just before or right after the company is sold. Frankly, this is wasteful and potentially poor stewardship of the resources God has entrusted to you. There are many strategies for transferring ownership of your business that help avoid ordinary income, capital gains, or estate taxes. National Christian Foundation has developed some interesting approaches that allow business owners who anticipate an exit to minimize taxes and shift the money into God’s Kingdom.
Communicating Your Plan
You need to communicate your plan wisely and at the right time. Key people in the company will need to know your intentions and the role they play in the plan. Key advisors need to be in the loop. Tell everyone who needs to know, but keep the circle as small as possible. And remember in all of this, timing is vital.