In running your roofing business, there’s only one guarantee: you eventually will exit — either voluntarily or involuntarily. The day will come when you’ll have to say goodbye. Exiting isn’t an easy process, and the odds aren’t in your favor. Therefore, in order to succeed, the business and the owner must both be prepared to successfully transfer the business.

It’s important to understand the difference between a business exit and a business succession. Both are needed to successfully exit your business, unlock your trapped wealth, protect your legacy and successfully move your company into the next generation or to an external buyer.

My experience has reaffirmed that business owners can’t commit to the difficult emotional succession process (replacing themselves) until they can clearly envision a financial future (exit plan and retirement) and accept the reality that they won’t outlive their money.

An exit plan is a necessary tool that will assist the business owner in controlling and visualizing the process of transferring and monetizing the business while getting a better understanding of the financial aspects of the transaction. Since approximately 70 percent of a business owner’s wealth is trapped inside his or her illiquid business, this should become a top priority.

This is a risky process. Several studies have concluded that fewer than 30 percent of businesses will actually transfer or sell to employees, managers or family, ending in liquidation, or 10 percent of the business value, for the owner. Further, when selling to an outsider, fewer than 20 percent of the companies that are brought to market actually close.

This is a sad statistic, since most owners fumble the ball in the red zone of their career, leaving a sad legacy for the company, employees, family, spouse and community.

In the simplest terms:

  • An exit plan focuses on monetizing the business’ trapped illiquid wealth without being clobbered by taxes and without running out of money in retirement. It provides a customized written plan that monetizes the business, meets the owner’s personal and financial goals, protects wealth and moves the owner into the next stage of life.
  • A succession plan focuses on the company successfully performing without the present owner by moving management into leadership, ownership and eventually replacing the empty CEO’s chair. This requires time, training, facing blind spots and stretching the team. A succession plan provides a customized written plan that focuses on the human side of the business.

Exit Plan

An exit plan helps secure the owner’s business wealth and sets the stage to move into succession. The plan establishes and controls the process of who, what, when and how to control this course of action while protecting your wealth.

The exit can be complex and taxing on a financial and emotional level. You can’t spend 30-40 years of your life building a business without a strong attachment. Business isn’t just what you do — it’s who you are.

This complex process requires specialized advice from your accountant, business appraiser, tax advisor, corporate attorney, estate planner, financial advisor and insurance advisor, among others. Coordinating and understanding the often disjointed advice can be overwhelming to a business owner who isn’t familiar with these concepts and terms.

The exit is also very taxing from a financial perspective, where you can surrender more than 50 percent of your harvest to taxes on the state and federal levels. In addition, each path has a different value, tax consequence and financial compromises.

Taxes can be reduced or eliminated by properly structuring, aligning and positioning the company to meet the complicated regulations. In this situation, time can be your best friend, so plan early.

Writing and creating the plan can take between four and nine months and will determine all your options for exiting your business. Why is this process so important? This is probably the owner’s largest asset; largest lifetime financial event; and final opportunity to execute the exit and secure a comfortable retirement.

An exit plan addresses the:

  • Coordination of your options in concert with your personal, financial and business goals.
  • Legal exit vehicles (i.e. sale, private equity, ESOP, management buyout, gifting). Note: most contracting companies exit via a management buyout.
  • Number needed from the company to meet your retirement needs and not outlive your income.
  • Financial and strategic considerations of your exit vehicles.
  • Asset protection from creditor and predators.
  • Options to meet financial and exit goals.
  • Customized plan with the tax strategy, buy-sell agreement, estate plan, income replacement, legal agreements and retirement plan that protects your wealth.

A written exit plan defines the owner’s goals, the salient parts of your wealth (liquid and illiquid), the value of the available options, the net amount after taxes and fees, tax implication, titling of all assets to assess estate tax exposure, legal agreement review, insurances and investment considerations. An exit planner’s role is to design and to quarterback this process during the execution with the accountants, lawyers, tax professionals, insurance advisors and wealth consultants.

An exit plan also puts the owner in control with a clear path to make an informed decision, control the process, leave the business on his or her terms, select to whom he or she wishes to transfer and decide when to exit. The exit process liberates the owner by allowing the person to move trapped money out of the business, protect his or her wealth and move into the next stage of life.

Succession Plan

The succession plan is about preparing the company to succeed in the absence of the owner/CEO. In a simple approach, it’s about grooming management to move into leadership and then into ownership, and ultimately establishing the new CEO. In a broader sense, it’s about building value, creating a culture of continuous succession that focuses on the human capital delivering a top-quality product to customers, reoccurring cash flow and protecting the future of the company.

The owner’s mindset for succession:

  • Must clearly envision the financial future before moving forward (exit plan).
  • Must envision being outside of the business before initiating the succession process.
  • Must control the timing of when and with whom in concert with goals.
  • Must lead the process but allow the team to grow, stretch and make mistakes.

A succession plan may take several months to write but several years to execute. The goal is to have the company run without the owner/CEO. Depending on the readiness of the management and the type of exit and current payout, a succession plan may run over three to 10 years. On the other hand, if the business is systematized, has clean financials and mature management is in place, the company could be sale-ready in less than a year.

My professional view is the owner must first deal with the exit plan to ensure and envision a financial future. This then allows the owner to focus on succession and build the championship team that allows the person to let go in order to stretch and coach them into leadership and ownership.

The exit plan leads the owner through a proprietary process that will meet the person’s business, personal and financial goals while objectively examining options for monetizing and protecting his or her hard-earned wealth. Once the owner is comfortable with meeting these exiting goals, they can move into the succession goals of identifying who will be the next leaders and the CEO of the organization.

Succession is a continuous process in a best-of-class company. Annual programs should focus on developing and stretching associates, not just the replacement of key positions. In this scenario, the company would always be near sale-ready condition. This plan can be in motion before a formal exit plan or formally executed afterward.

 The great news about succession is that it adds bottom financial value no matter which exit path you take. Remember, the key is to start early. Exiting and succession are not events but a complex process that takes time.