This second newsletter in a series of exit planning cases is intended to further put into action many of the multi-layered and theoretical aspects of exit planning.  It is intended to have you begin to see yourself in the position of our exiting owner, Bill Brown, to see how much of our exit planning system can apply to your situation.

When we last left off, Bill Brown had recognized the value of planning for his exit and was following the direction of his exit planning consultant, Michael.  Michael is having Bill follow a system for his exit and he has gone through one of the most challenging of the 6-step process – the first step of establishing goals and envisioning a life beyond Bill’s business.  Bill sees that these exercises are putting him in a position of moving closer and closer to an exit and are helping Bill to make better decisions in his business to provide for this exit in the future.

Step #2 – Bill’s Readiness for His Exit

After setting his goals, Michael is now helping Bill to measure and better understand his personal readiness for his exit.  There are two (2) primary components to measuring an owner’s readiness for their exit.  The first is the ‘financial readiness’ of the owner and next is the ‘mental readiness’.  We begin with Bill’s Financial Readiness.

Bill’s Financial Readiness for His Exit

Michael knows that Bill is going to need specific guidance as to whether or not he can afford his exit.  The reality of most business owners is that they spend much more than their W-2 income within their business.  This means that most owners of private business ‘live out of their businesses’ by personally expensing many items.  Beyond this issue there is also the fact that owners tend to have most of their wealth concentrated into their businesses, constantly betting on themselves and their company’s potential for growth.

After twenty (20) years of building his Brewery business, Bill, like most owners, has most of his wealth tied to his illiquid business.  Also like most owners, Bill has a relatively small amount of money saved outside of his business.  This means that Bill has a Financial Readiness which is Low.  With a Low financial readiness, Michael needs to provide specific guidance to Bill as to how he can turn his illiquid business wealth into cash or a stream of tax-efficient income that Bill can have access to in order to provide for his post-exit lifestyle.

In our example, Bill has $800,000 saved in his investment accounts but spends almost $280,000 in after-tax expenses every year.  This means that at 58 years old, Bill only has a few years of living expenses available to accommodate his annual lifestyle.  The difference between what Bill has saved and what he needs is his Value Gap.  Michael determines that Bill will need to get a significant amount of his illiquid business wealth out of the business to pay for his post-exit lifestyle.

Mental Readiness for Bill’s Exit

Mental readiness, generally, is an owner’s willingness to stop working.  In our last newsletter Bill commented to Michael that he is not ready to ‘let go’ of the business.  Accordingly, Michael and Bill are planning on a long-range exit for Bill from his business.  Bill recognizes that an exit plan does not mean that he is leaving the business anytime soon or that he is going to necessarily sell the business to someone else.  In fact, with a Low Mental Readiness, Bill can focus on removing himself from the business over a longer period of time, keeping his job and maintaining control over his business and eventual exit.

Bill’s Mental Readiness can also be equated to his time-frame for an exit.  In this case Bill wants to understand how he can remove the equity in his business while also continuing to work over a number of years.

Step #3 – Type of Exiting Owner

In our third step of the exit planning process, Bill wants to understand what type of exiting owner he most resembles.  In this case Michael helps Bill see that based upon his Financial and Mental Readiness, Bill most resembles a ‘stay and grow’ exiting owner.  The Exit Quadrant Chart below illustrates this important point.

Bill is in agreement with Michael’s assessment but now wants to know how he applies this to his exit planning.

Step #4 – Exit Options

Our fourth step in the exit planning process is helping Bill understand the options that are available for his exit.  As we saw, Bill is interested in options that are aligned with his personal readiness.  Once Bill comes to understand his various options for exit, he will be in a position to choose the direction that he wants to head for with his exit.  The five (5) primary exit options that Bill can pursue are:

  1. Sale of the Business
  2. Private Equity Group Recapitalization
  3. Employee Stock Ownership Plan (ESOP)
  4. Management Buyout
  5. Gifting

These options for Bill’s exit are put into the Exit Options Chart below so that Bill can begin to understand the options that are most applicable to his current readiness for his exit.

This fourth step in the 6-step exit planning process is designed to have Bill understand that there are many ways to exit a business.  The option that is best for him will be the one that moves him in a definite direction towards a successful exit.  Michael has helped Bill measure his goals and his readiness for his exit.  Bill has come to understand how the different options for an exit apply to his situation and how the 6-step exit planning process is most helpful in moving Bill’s thinking toward confidently exiting his business and protecting his illiquid wealth.

Since the first conversation with Michael, Bill has come a long way in his thinking about his exit, now better understanding the proven 6-step system for an exit and how it can help him define and achieve success for his exit.

What remains now is Bill’s ability to get enough value to meet his financial needs and then to make certain that he does not lose it to taxes and other wealth detractors.  That will be the focus of the next and final newsletter in this series.

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