Exit Planning Begins with Step One: Set Goals

In prior posts we have mentioned The Seven Step Exit Planning Process™—the proven, owner-centric process that business owners use to plan successful exits from their companies.

The process benefits both owners and their companies even if they never plan to exit, but it begins and ends with an owner’s principal exit objectives: 1) the date the owner wants to leave, 2) the amount of money owners want in the bank when they leave and 3) the successor they chose to take over their companies.

Once owners set these three objectives with your help and that of the other members of their Exit Planning teams, they can proceed through the next six steps of the process: determining and, if necessary, building and protecting business value, managing and coordinating business continuity and estate planning issues and finally, executing the transfer so that it meets the owner’s financial and other goals.

For some owners, a thumbnail sketch of a plan to achieve their goals is adequate. They know they should be planning for the most significant financial event of their business careers, and they like the fact that this Exit Planning Process is all about them. With these owners you can immediately dive into the planning process. Other owners however, need more of an explanation. They want to know exactly how the process works or, perhaps, why they can’t skip some of the steps.

To answer that question, or at least to explain why they can’t skip Step One, there are three pieces of information that must be accurately quantified before anyone can create a coherent or comprehensive Exit Plan: 1) a target departure date, 2) a preliminary financial needs analysis, and 3) a chosen successor.

The reason many owners never begin Exit Planning is that they have not spent any time considering the terms and conditions under which they would happily leave their businesses. Nor will they begin unless and until you initiate a discussion with them about those “terms and conditions” (their exit goals). Your discussion involves asking owners a lot of “why” questions designed to clarify their thinking and uncover goals they may not be aware of. In order to do that well, you need a solid understanding of exit goals, so let’s begin with the goal most owners have floating around in their minds.

Target Departure Date

Setting a target departure date is indispensable to creating an Exit Plan. For example, a plan for an owner who wants out in two years looks quite different from a plan for that same owner with a departure date ten years later. BEI’s survey of owners indicates that almost all owners have an exit date in mind: half want to exit within 5 years and 80 percent within 10 years.

Types of Departure Dates

Interestingly, while owners set their departure dates first, it is the one objective that owners most often adjust, and adjust repeatedly. This ongoing tinkering is so prevalent that Exit Planner’s refer to it as the “perpetual five-year Exit Plan.” Owners want to exit in five years, but since they never start the exit process, they are always five years away from leaving. These owners typically pick a date—“five years from now” out of the air. Since the date has no particular meaning for them, it is easy to ignore. You can determine if a departure date holds meaning for an owner by asking a number of questions such as, “Why do you want to exit in five years? What do you see yourself doing in five years?”

Many owners pick an event-related departure date. For example, do they want to work until their children reach a certain age or level of education? Other owners want to remain until the business value reaches a certain level, or until the business can operate without them.

Still other owners base their exit date on more personal reasons. For example they may calculate the number of active years they want to live without working to arrive at a departure date.

Departure Dates Prompt Action

When owners set a departure date based on their personal aspirations, they are more likely to take action. These owners are pulled into action because they want to exit on a specific date for specific reasons.

The message is clear: If you let an owner off the departure date hook, you have handed that owner a license to procrastinate. When that happens, owners take no action, you have done them no favors, and you do not have an Exit Planning client. Owners must set, even tentatively, a departure date to give their Exit Plan a stable framework. Until that date is set, you cannot begin to create a successful Exit Plan.