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The vast majority of the personal wealth of most business owners is the value of their business.
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Getting access to that trapped wealth in the owner’s business is a principal goal of a successful access plan.
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Business owners without an exit plan may never realize the potential value of their business.
Their closely held business represents for many owners not just a source of income but also the largest portion of their personal wealth. Yet, a common issue is that much of this wealth remains tied up in the business, making it difficult to access without a well-thought-out exit strategy. Without proper planning, owners may find themselves struggling to realize the full value of their company when it’s time to sell, transition, or retire.
I see it in my law practice. Owners reach retirement and discovery they own a job, not a business. In many cases, there is no choice but to liquidate or simply close.
Without an Exit Plan, Personal Wealth Often Remains Trapped
The statistics revealed through surveys of the Exit Planning Institute suggest that for many owners without an exit strategy, that wealth may stay trapped there forever.
- 70-80% of Owners’ Wealth is Tied to the Business
- 70% of Businesses Put on the Market Don’t Sell
This is where the Exit Planning Institute’s (EPI) guiding principles of exit planning come into play. The EPI’s approach focuses on maximizing the value of a business while aligning it with the owner’s personal financial goals. Working with a Certified Exit Planning Advisor (CEPA) can help business owners navigate the complexities of exiting, allowing them to unlock the personal wealth trapped in their business.
What is Exit Planning?
Exit planning is the process of developing a comprehensive strategy for transitioning out of your business. Whether you’re planning to sell to a third party, transfer the company to family members, or transition ownership to employees, exit planning involves preparing the business to operate without you, maximizing its value, and ensuring that your personal financial goals are met.
At its core, exit planning is about value creation. It’s not just about getting out of the business; it’s about leaving it in the best shape possible to command a premium when you exit. This involves looking at the business from a buyer’s perspective and ensuring that every aspect—from finances to operations—is optimized.
The Exit Planning Institute has established a framework that business owners can follow to ensure a smooth and profitable exit. Their approach is holistic, considering not just the value of the business but also the personal, financial, and emotional needs of the owner.
The Role of a Certified Exit Planning Advisor (CEPA)
A Certified Exit Planning Advisor (CEPA) is a professional trained in the practices and principles of the Exit Planning Institute. CEPA professionals work with business owners to develop an exit strategy that aligns with their financial and personal goals.
The CEPA process includes several key steps:
- Identifying Owner’s Objectives
Every exit plan starts by identifying the owner’s personal and business goals. Do you want to sell the business and retire? Pass it on to family members? Transition ownership to employees? Understanding your end goals is critical in shaping the exit strategy. - Determining Business Value
Many business owners don’t know the true value of their business. A CEPA helps conduct a business valuation to determine its worth. This gives you a baseline from which you can work to increase value. A valuation should be perfored annually. - Maximizing Business Value
Once the current value is known, a CEPA will identify areas where value can be improved. This may involve strengthening financial performance, improving operations, or building a more skilled management team. Maximizing value is key to unlocking personal wealth at the time of exit. - Assessing Owner’s Personal Financial Needs
A CEPA will help you align the sale or transition of your business with your personal financial goals. They work with your financial advisors to ensure that the proceeds from the exit will support your retirement or other personal objectives. - Creating a Business Continuity Plan
A critical part of exit planning is ensuring the business can thrive without you. A CEPA helps create a plan for continuity, whether that involves bringing in new leadership, developing a strong management team, or implementing succession plans. - Choosing the Best Exit Option
There are many ways to exit a business—selling to a third party, transitioning to family members, or engaging in an employee stock ownership plan (ESOP). A CEPA will help evaluate the pros and cons of each option and choose the one that best aligns with your goals. - Executing the Plan
Finally, the exit plan needs to be executed. This may involve preparing the business for sale, negotiating with potential buyers, or implementing a succession plan. A CEPA coordinates with legal, financial, and business professionals to ensure the process goes smoothly.
Unlocking Wealth Through Value Creation
Unlocking the wealth in your business requires a value creation mindset. The principles of the Exit Planning Institute emphasize that maximizing business value isn’t just about making the company more profitable today—it’s about creating sustainable, transferable value that will appeal to future buyers or successors.
The three drivers of value creation are:
- Financial Performance
Strong financial performance is the foundation of a valuable business. This includes maintaining healthy revenue growth, profitability, and cash flow. A CEPA will work with you to improve your financial metrics and ensure that the business is on solid footing. - Operational Efficiency
Buyers want businesses that run smoothly and don’t depend too heavily on the current owner. This means having efficient systems, processes, and management in place. By building a strong operational foundation, you make the business more attractive to potential buyers and increase its value. - Scalability and Transferability
Buyers also look for businesses that can grow beyond their current size and can be run by someone else. If the business depends on the owner’s relationships or expertise, its value will be diminished. A CEPA helps owners make their businesses less dependent on them, ensuring that value can be transferred to a new owner.
The Personal Benefits of Exit Planning
For many owners, their business represents years of hard work and dedication. It’s often more than just a financial asset; it’s a major part of their identity. Exit planning takes into account not only the financial aspects of the exit but also the emotional and psychological aspects.
Working with a CEPA can help owners come to terms with the transition and prepare for life after the business. This can involve setting new personal goals, planning for retirement, or even identifying new business ventures. The exit planning process helps ensure that the business owner’s personal goals are aligned with their business goals.
Why Start Exit Planning Early?
Many business owners make the mistake of waiting too long to start exit planning. This can result in a rushed sale, a lower valuation, or an inability to meet personal financial goals. Ideally, exit planning should start several years before the planned exit.
Starting early gives you time to build value in the business, address any issues that may reduce its attractiveness to buyers, and ensure that your personal financial situation is in order. It also gives you flexibility—if the market isn’t right for a sale or transition, you have time to wait for more favorable conditions.
Exit planning isn’t just for owners who are ready to retire. Even if you don’t plan to exit for many years, having a plan in place will help you make better decisions for your business in the short term. It will also protect you in the event of an unexpected exit due to health issues or other unforeseen circumstances.
The Bottom Line
Exiting your business is one of the most important financial decisions you will make. Without proper planning, you risk leaving money on the table or failing to achieve your personal financial goals. The principles of the Exit Planning Institute and the expertise of a Certified Exit Planning Advisor (CEPA) can help you unlock the wealth trapped in your business.
By starting the exit planning process early, working with a CEPA, and focusing on value creation, you can ensure a smooth and profitable exit that aligns with your personal and financial goals. Don’t wait until it’s too late—begin planning now to maximize the value of your business and secure your future.
The Time to Begin Exit Planning is Now
Exit Planning is good business. It increases value, transferability and assures continuity. If you’re a business owner looking to unlock the wealth in your closely held business, it’s time to start planning your exit. Contact me to begin the process of preparing for your future.