Planning for an Unexpected Forced Business Exit
An exit strategy is all about being prepared—however, it is estimated that less than 40 percent of American companies have an established plan that prepares for an unexpected exit. A well-planned exit strategy will maximize the existing value of your business and protect its future value should the unexpected occur.
Planned exits include retirement, transition to business insiders, and sale. However, more than 55 percent of all business exits will be the result of some unexpected event such as death, disaster, or divorce. So even though you can hope your exit will go according to your personal plan, it is imperative to prepare for an unexpected exit. The time required to sell your business and whether or not you maximize its value at sale, should a forced exit occur, will be directly related to your preparedness. A well-planned exit keeps the control in your hands.
Here are some strategies that can help a business handle the unexpected:
1. Death. The success of companies often depends on the owner’s unique skills, experience, and the personal relationships they have developed with suppliers, customers, and employees. The sudden death of an owner could leave many businesses unable to survive. An exit plan should outline management succession and make sure those individuals are given the training, information, and incentives they need to keep the business running and successful.
2. Disability. While death is emotionally devastating for survivors, more companies survive the death of an owner, than if the owner suffers from an ongoing illness or disability, which can strain cash flow or cause excessive down time. Again, an exit plan should define management succession and also include tools such as income protection and business overhead insurance.
3. Debt. Most business owners have personal guarantees on business debt and other significant financial exposures. A well-thought-out exit plan needs to insulate the owners’ personal assets and investments should the business fail.
4. Dispute. Many business partners begin as friends or colleagues. But today’s close relationship can be tomorrow’s litigant. It is imperative that an exit plan spell out the rights of a partner, in case one owner wants to exit on terms the other owner doesn’t approve of or if only one owner wants to exit. I typically recommend a robust buy-sell agreement as part of the exit planning process.
5. Disaster. An exit plan is an ongoing process so it should also include a provision to regularly back up all key computer systems and documentation. This will ensure that it can resume operations with minimal delay in the case of a natural, technical, or physical disaster, thereby protecting the value of the company.
6. Divorce. For as much as newlyweds believe they will grow older together, the reality is that half of all first marriages and two-thirds of second marriages in the United States end in divorce. In community property states especially, divorce can lead to having to sell a company or with one spouse buying the other out. Your exit plan should outline how assets will be divided in the case of divorce without undermining the value of the company.
Planning for your unexpected exit is not only practical but it will give you peace of mind and the confidence of knowing you are protecting your business— as well as your family, employees and shareholders.
We help prepare companies for the unexpected by helping business owners devise an exit plan that covers both planned and unplanned exits so that their company can minimize the loss of value in the event of a catastrophic event.
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