Unfortunately, most business owners put the planning off until it’s too late. Don’t wait until you wake up one day thinking “I’m done, time to go.”

So, while Exit Planning probably seems like a distant concern for you, it still makes sense to understand what it involves. While I will argue planning for the future is essential to ensure a smooth and profitable exit when the time comes, getting your head around the scope involved can be advantageous as well. There may be parts that you can cherry pick to reduce the risks you are most concerned about. Or I might just convince you to work through the whole process.

In this blog, I want to delve into the world of exit planning from a practitioner perspective – the aspects I tend to focus on when coaching my clients through their plans.

Exit Planning vs. Succession Planning

Before we dive into exit planning, let’s first distinguish it from succession planning. These terms are often used interchangeably but serve different purposes.

Exit planning focuses on your strategy as the owner of the business for exiting the business, regardless of who takes over. It isn’t just thinking about selling the business, and what the business is worth. It also involves other paths to exit like passing it on to family members, merging with another company, or even liquidation.

Succession Planning, on the other hand, primarily deals with identifying and grooming a suitable successor to take over the business and other key roles in the company. Succession Planning can be a subset of exit planning, or might be undertaken independently of a change of ownership.

Key Factors in Developing an Exit Plan

My exit planning engagements are almost always effected using a coaching format. My role is to guide the process rather than do it for you. I believe an effective plan is one that you have developed and have a strong link to, as opposed to a template-driven approach or where I write the plan for you. I find my clients’ deep involvement in the process means they have a better understanding of what is important to them and their business.

A general piece of advice I stress is the importance of having a plan in the first place, and the need to have developed the plan well before it is expected to be needed. In this way, you have the plan ready should something unexpected happen, but also gives you plenty of time to implement any changes in the business necessary. Ideally, this process starts 18-24 months before the desired exit, but I have also seen business owners have their plan in place five or more years in advance. It is rare, but it does happen!

I tend to start my exit planning engagements with a discussion around my client’s motivation for exit. My aim is for this to be very specific, but also a personally compelling reason. I use this through the process as the motivator to keep moving. Your why should be quite specific. More than just ‘I want to spend more time with my grandchildren’ or ‘I would love to travel.’ Many exit plans are well before retirement, freeing up the owner to start a new business in a new field.

Your why, your exit objective, will typically indicate personal and financial goals. It may also define the continuation of your business with you in a reduced role before your total retirement. Your objective can evolve a bit through the planning process, and even after the plan is finalised.

Your objective is also a part of defining your legacy. This isn’t always a big thing for New Zealand business owners. I am having more conversations around legacy, though, even if that term isn’t used.

Exit Planning is a Team Sport

A note here about who gets involved in your exit plan. The process isn’t just you and me in a room. There’s a bit of that, but we also need to involve a few others, depending on the situation. There are generally three groups that need to be involved in different ways:

1. Your family and family advisors. There is a focus here on family dynamics and wealth management.
2. Your business. Employees, key suppliers, and customers can have a role to play.
3. Your professional advisors, like your lawyer, accountant, and board members.

There are activities that can run in parallel working with each group separately. This can work well with higher net worth individuals and families. In my engagements, most activity is happening as a single workstream. I am careful not to overwhelm you with additional work – you are still running the business, after all!

Start Here: Where Are You Now?

Once you have locked in your exit objectives, the next step is a brutally honest assessment of where you are now. This includes an assessment of the weaknesses of your company and a determination of the value of the business and what you want – or need – to get when you exit to fund whatever is next.

At this point, my role is to undertake a business valuation of your business, setting the starting point for the exit process. Having a fix on what your business is worth helps you determine whether it’s enough. In my experience, most small business owners are genuinely surprised that their business is not worth as much as they think (or have been told by an accountant or business broker). Most business owners genuinely have no idea what the business is worth or how to value it. And this is an issue because many business owners are certain they can sell the company and retire on the proceeds. In most cases, they can’t.

Most businesses are not adequately prepared for sale – remember above I suggested you need to start 18-24 months out? You need that time to do the analysis, make necessary changes, and then lock them in to maximise value. Something I highlight to clients here is that a buyer will want to see three or more years of trading results before they decide to buy. You need to be able to demonstrate the impact of the changes we plot through the planning phase in your financials. You need at least 12 months’ trading history to show what the business can do. Making a change a month or so before listing the business for sale will not be convincing.

While your exit objectives will set an initial timeline for your planned exit, we update that timeline based on the outcomes of this step. We will regularly revisit the timeline to ensure the plan is progressing adequately, and that it is realistic in terms of implementation. There can be a lot that needs doing!

Timing The Market

Attempting to pick the right time to exit your business based on what is happening in the market is a complex endeavour. Get it right, and you can significantly increase what you get for your business. But the risk you need to keep in mind is that you can’t control the market, and may not even be able to control when you need to exit. My general approach when discussing timing with my clients is to (a) focus on their motivations for exit, and (b) get the business ready for their exit in any case. Be ready to put the business on the market when it is right for you and the market if possible.

Take a look at the blog entry Business Cycles and Business Exits for a fuller discussion.

Prepare Your Financials

You know that every potential buyer is going to want to see your recent trading history. This is the most common – and for many buyers the most important – insight into your business. Buyers will often ask to see your financials before they ask for anything else. The financials can represent a make or break for a buyer.

Preparing your financials isn’t just a matter of collating some reports from your accounting system and stapling them together. There is much more to this stage.

It is probably useful here to define what is included in financial reports. In the vast majority of cases, you will include:

• Your annual Profit and Loss Statement (also known as your P&L, your Income Statement, or your Statement of Financial Performance) for the financial year.
• Your Balance Sheet as at the end of that financial year. The Balance Sheet is also called a Statement of Financial Position.
• Your Cash Flow Statement for the financial year.

I haven’t defined or described these as you should know what they are.

Different types of businesses will generally include other types of reports pertinent to their industry. I will discuss these a little later.

You should have these reports prepared by your accountant each year. In most cases, they will prepare a collated report. This is basically saying they have used the numbers you provided, they asked a few questions, but they didn’t test the data. If you give them bad data, but it seems OK, that is what they will report. These types of financials are unaudited. What is included is some other information that can be of interest. Your accountant will provide a limited commentary based on their observations by way of footnotes. They will line up this year’s results against last years. They will use very standard formatting, which makes it very easy for others to review.

Your financials reports for the last 3 to 4 years need to be made available to potential buyers. They are generally provided after a confidentiality agreement is completed, but before an offer is received. In most cases, a buyer will not want to spend time looking at your business until they have reviewed your financials.

When you get to due diligence – or during a formal valuation – you will also need to provide additional reports, and give more detail. For example, I will ask from monthly management reports since the end of the last financial year, and request these be updated with the latest results as they become available.

Other Financial Reports

You may be asked for some of these reports early in the buyer’s process depending on the type of business. It is likely you will need them for due diligence.

• Budgets and Forecasts. You should at least provide the budget for the current year, showing trading progress against the budget. This should be broken down by month, showing variations between the budget and actuals, and ideally using the same Chart of Accounts as the P&L. It is a good idea to write up a commentary about the performance against budget – you will be asked (good or bad). If available, include forecasts or projections to demonstrate your business’s growth potential.

When I am performing a business valuation, I would like to see budgets for previous years to be able to get a sense of how accurate your budgeting process tends to be. I also want to see at least two years of forecasts – more if they have been done. I will also need to understand the key assumptions that underpin these forecasts. A good forecast will be in the same format as the Chart of Accounts, but at the very least I need to be able to calculate down to EBPIDT. I need to have the values for the addbacks at a minimum.

In some cases, I will want more historical P&L data as well. Sometimes, I want to be able to see what happens across an entire business cycle.

• Accounts Receivable Aging Report. A buyer will want to see the AR aging report as at the end of the financial year to understand how much of the balance sheet figure may be uncollectible. This can also tie into your bad debts policy and provide insights into business liquidity and working capital requirements. Even though – in most cases – the buyer isn’t taking on your AR balance, they are trying to understand the level of risk they might need to manage.

Do not provide the buyer with an AR aging report that includes the names of your customers. Use unique codes instead of account numbers or names. The identity of your customers should be carefully protected. You will need to keep a cross-reference table to ‘decode’ the identifiers.

For a valuation, I also want to see monthly AR aging reports to see how the figures change over time, and to identify frequent offenders.

• Accounts Payable Aging Report. This isn’t a report commonly provided before due diligence – and even then often not asked for. A buyer (or valuation analyst) may use it to assess working capital requirements, credit terms, and supplier relationships.
• Bank Statements and Tax Returns (GST, FBT, and Income Tax). In retail and cash-based businesses, it is not uncommon for a buyer to want to assess the actual flows through the business, from sales receipts (till tapes or POS reports) to ensure the cash flow is real. These data are compared to bank statements and tax returns (e.g., GST) on the expectation that owners may fudge the data to a buyer (and their broker), but not to the IRD.
• Fixed Asset Register and Depreciation Schedule. What are the assets in the company, what did they cost, and how are they being depreciated? This will be a report as at the end of the financial year.

More Than Reports

Preparing your financials is more than getting reports ready. It also involves looking at the process of getting your reports ready to see what you can streamline or even outsource. This can also be a good time to look at your systems to ensure they are appropriate for your business. In some cases, you may need to look at modernising some or all of your systems. If your systems add significant risk to the business, rolling out a new (mainstream) system can make a sale easier. Running a standard (i.e., common) type of platform can have its advantages when you are planning your exit.

During due diligence, a buyer will be asking a lot of quite specific questions, and the speed with which you can provide an answer can be important. An effective reporting capability – both regular reports and ad-hoc queries – can enhance the value of your business. Such a system can certainly lower your effort during due diligence.

As you work through your financials, budgets, and forecasts, look out for anomalies and things that might give a buyer pause. Work through your debts, loans, and other liabilities to see what needs to be cleaned up and otherwise managed during a business sale.

When valuing a company, I run a number of ratios across the P&L and Balance Sheet that can be used to identify year-on-year trends and compare with industry benchmarks. I am looking for those things that stick out, that appear unusual for the type of firm. Inventory turns and aging are a common factor that comes to light. I also assess the collectability of monies owed to the business, and look at debt structure to be satisfied the long-term debt is actual debt.

This is also the time I advise my clients to discuss any tax liability that might arise in an exit with their tax advisor so we can look at how any tax efficiency steps can be integrated into their exit plan. The major issue that comes up often is en equity sale versus an asset sale. My advice to my clients is to assume an asset sale as this has the greatest tax implications. If they manage an equity sale, the tax situation will be simpler for them.

Succession Planning

I generally roll up all the employee matters associated with an exit under the banner of Succession Planning. The key part of this is ensuring you have a capable team to run the business in your absence. Buyers don’t want to buy a business that is highly dependent on you as the owner. There is too much risk in transitioning you out at exit. Another factor that can deter a buyer is having family members as employees. Your buyer is not going to want to employ your family members. They will be concerned about employee loyalty, productivity, and even whether your son or daughter is worth what they are paid and whether they are the best choice for the role. Plan to transition family members out of the firm well before your planned exit.

Another aspect of the business’s dependence on you as owner is to find ways to reduce your operational involvement. Start by documenting everything – policies, procedures, methods, suppliers – everything about running the business that sits in your head. Then, organise and centralise all key business records and documentation. This makes it easier for the due diligence process to take place, and for handover once the deal is done.

Move customer and supplier relationships off to others in the business. This is a common dependency firms have on their founder/owners. What starts as demonstrating to customers how committed you are to them becomes a rope around your neck when it comes to exit. By handing off these relationships well before you exit, you have a chance to strengthens these key customer and vendor relationships while reassuring buyers of the business’s stability and potential for growth.

Working through these issues effectively can also make possible the creation of a business continuity plan. For most small businesses, the likely time a continuity plan is needed is when the owner is unexpectedly unavailable – untimely death or significant medical incident being the most familiar. Think about it: if you suddenly counldn’t go to work for the next month – and are unavailable by phone and email – what happens to your business? Who steps in? Can they access the systems, spreadsheets, documents, and so on on your laptop? Can they control your bank account? Can staff and supplier be paid? Can new stock be ordered? Who is fronting the business to customers? Will your business survive? A complete Exit Plan includes a business continuity plan that addresses they kind of issues.

Looking more specifically at the succession issue will depend on how many employees you have. Most of my clients have fewer than 10. Identifying potential talent can be difficult because employees tend to be a good fit for their current role, and are only assessed for moving into other roles when there is a specific vacancy or rapid growth that results in new roles being created. Small firms are less able to have ‘talent waiting on the bench.’ In this setting, succession planning is often more about how a critical vacancy will be filled (both short- and long-term) rather than a focus on who. You succession plan is also of value to whoever buys your company.

Early in the exit plan development is also a good time to have a discussion with key employees about your eventual exit. Reassure staff that it is still some time off, but you want to be able to ensure the firm’s strength and survival. You may find one or more employees put their hand up as possible buyers, which opens up a different set of discussions and exit options. You will, at the very least, use this announcement to maintain trust, minimise disruptions, and help ensure a smooth transition.

You are likely to need the assistance of key staff in preparing and formulating your exit plan (and continuity plan), so the sooner they are able to get involved, the better.

Not all business owners are comfortable telling their staff they are thinking of leaving. They worry that staff will leave, reduce their efforts, and that customers and suppliers will find out. I preach a high level of openness with employees, and counsel my clients to press through their fears. I am not always successful, though, and from time to time use the development of the business continuity plan as the ‘cover’ for the exit planning engagement.

The final step of succession planning that I take my clients through is a review of employee contracts, salaries and benefits. Make sure you have proper legal contracts in place with all staff – ideally using a single standard employment contract. Update your employee handbook (or develop one). Ensure all of your employees are paid an appropriate wage or salary (and this should include the owner). Review all contract employees to determine whether they should be employees. Make sure vacant positions are filled, and cull any excess. Get the business running as normally as possible as a baseline so that any subsequent enhancements can demonstrate a great return on the investment involved.

A buyer wants to see a well-organised, effective, and engaged workforce. They don’t want to worry that employees are underpaid, and therefore a flight risk. They don’t want employees expecting pay increases from a new owner solely because they are the new owner.

In some cases, retention of key employees will be critical to closing a deal with a buyer. Identify these key employees and maintain a good rapport through the period before sale. In some cases, it may be necessary to pay some of these employees to stay through the transition. This could be a cost to you or the buyer. What you need to have identified up front is who needs to be incented to staff if need be.

I don’t try and transform the client’s firm into a mini-Google with beds, and meals, and Foosball tables, and other fancy perks. Keep things appropriate and mainstream for your industry. Still keep a tight lid on expenses, but don’t squeeze it so tight that staff and customers become dissatisfied.

Tidy Your Affairs

A part of an effective exit planning exercise deals with you and your family, and your preparedness for pushing the button on your exit plan. These discussions and activities typically include other professional advisors, such as your family lawyer and investment advisor.

A starting point for this is to update your will. Depending on the specifics of the exit plan, other shareholders in your family may also need to update their wills as well. The purpose of the wills being updated is to ensure the plan you have in mind for the business is implemented. Businesses need certainty to ensure continuity, and your will can provide that certainty. You should discuss the drafting of your will with family and your lawyer.

Next you need to consider what you want to do with any proceeds from a sale, or ongoing dividends once you step back from day-to-day management of the firm. This generally falls under Wealth Management, and can involve discussions with investment advisors and relationship managers at your banks.

It is imperative that you discuss your exit plan with your family members, particularly immediate family who may have had expectations about taking a future role in your company, or were relying on a share of your wealth to fund their own futures. Clarity (and possibly some hard discussions) now can save a lot of heartache and disappointment later.

Throughout this process, you will possibly be dealing with topics of mortality, retirement, and legacy. Planning for your exit from your business can be an overwhelming emotional process. You need to be prepared for the psychological challenges and consider seeking support from a mentor or counselor. Don’t be afraid to ask for help, and don’t ignore the potential emotional toll.

Retool the Business for Exit

This is the execution phase of the Exit Plan. This is where you put in place the range of changes necessary for you to transition out, while the business survives and thrives. These operational changes can require new expertise, resources, or funds to make happen – and that is all part of the plan. You should have at least a high-level roadmap of what needs to be done, along with the timeline.

Customer and Vendor Relationships: Where you are responsible for the relationships with any customers or suppliers, you need to start handing these relationships over to employees. At the same time you need to strengthen these key relationships to reassure the new owners of the business that the firm is stable and still has the potential for growth. This can be a good time to ensure customers and suppliers are contracted to the firm (but that these contracts can be transferred by you). Where you have particularly favourable terms with suppliers, lock these in for an extended period that will flow through to new owners. You don’t want to be surprised by a supplier withdrawing their products during the sales process.

Diversify Revenue Streams: Reduce the firm’s dependency on major customers or suppliers, making your business more resilient and appealing to potential buyers. You also need to keep in mind that a buyer may be particularly interested in acquiring your firm because of key customers or even favourable supplier relationships.

Employee and Stakeholder Communication: It is vital to communicate your exit plans with key employees and stakeholders well in advance. This helps maintain trust, minimizes disruptions and surprises, and ensures a smooth transition. Handled well, employees will see a change in ownership as a positive opportunity rather than the end of their jobs.

Legal and Regulatory Compliance: Ensure that your business complies with all relevant laws and regulations, including necessary permits, licenses, contracts, and intellectual property rights used by the business. Undertake an independent audit of essential aspects of the business.

Intellectual Property: Take the appropriate steps to protect and enable the transfer of the firm’s intellectual property rights, trademarks, copyrights, and patents as necessary during the exit process.

Special Deals and ‘Mates Rates:’ Codify unwritten agreements, particularly where you give or receive special pricing or conditions. Having this documented makes them transparent for buyers.

Business Records and Documentation: This can be a significant task. Organise and centralise all of the firm’s important business records and documentation, making it easier for the due diligence process during a sale. Catalog the information, and ensure it is sufficiently complete and consistent.

Security Review/Audit: Have your systems, including websites, audited for security. You do not want a cyber-incident during the sales process.

Contingency Plans: Finally, you need to develop contingency plans to help you manage when the unforeseen or unexpected event occurs that could impact the sale or transition of the business.

This is not an exhaustive list of operational changes that may be necessary. Every business will have unique requirements. Work with your advisors to identify other factors that may be important in your business.

Prepare For Sale

The final set of activities relate directly to the process of selling and transferring the business. These are discussed separately.

Wrap-Up

This is a high-level, generic overview of what is involved in putting an exit plan together. Exit plans in reality are highly tailored to you and your firm. They take time to work through and implement, and require your attention. An exit plan can’t be done for you. You have to be an active participant.