8 Key Disciplines of a Successful Exit from Your Roofing Business
Ideally, succession planning should be an ongoing process so that when you’re ready, the final transition can take place in three years.
An owner’s exit from a business will probably be the largest financial event of their life. Most statistics reveal that private owners have more than 70 percent of their wealth trapped inside their illiquid business.
Further, harvesting the illiquid wealth trapped in a business can be one of the most complex transactions an owner will ever face.
The exit planning challenge simply comes down to this:
1. How are you going to cash out — without being clobbered by taxes?
2. Retire and …
3. Not outlive your money?
Key to your successful navigation of this process is gathering the best information to minimize risk, making correct decisions, and understanding the financial and strategic control issues required to replace your income. This process protects your hard-earned wealth and legacy.
To successfully exit your business, you will need to develop a comprehensive, multifaceted exit plan. The exit plan requires collaboration with a wide range of advisers — including attorneys, accountants, valuators, estate planners, insurance advisers, financial planners and business consultants — to combine eight business disciplines, from valuation analysis to succession to tax planning.
Another option that would be wise is to seek the services of an exit planner to act as a process consultant during this process. An exit planner can coordinate the many moving parts, helping to guide you through the various disciplines and working with the numerous collaborators. An exit planner can ultimately help you move down the exit path to reach your goals, reduce your risk and achieve the best result.
Before beginning the exit process and seeking input from advisers, it’s important to fully understand the eight disciplines that make up the exit planning process. You may feel a little overwhelmed by information overload during the various discussions among advisers. Often the conversations are focused on each adviser’s transactional space and key in on one area, which limits transparency and isn’t conducive to holistic solutions. An exit planner can ease this process and help you address these challenges.
1. Contingency Planning
Contingency planning addresses what will happen to your business interest in the event of an unexpected, life-changing event such as death. A contingency plan should address the key areas of your business, including management and relationships with business partners like bankers, insurance agents, and so on.
Most of the time contingency planning is framed in terms of a buy-sell agreement, but when there’s only one owner it becomes even more critical for the owner to have memorialized their intentions. That way, in the event of a death, the business can continue to operate while mitigating the potential free fall of value. Contingency planning should also be coordinated with wills, trusts and life insurance.
2. Business Planning
Business planning explores the external and internal transfer options in anticipation of selling the business. It involves discussion of the timing of a business’ sale, strength of the cash flows and business value drivers. Both the business and the owner must prepare for the exit.
3. Valuation Analysis
An accurate valuation analysis provides information about the worth of a company within a specific range. The value will vary depending on several criteria, one of which is the exit path chosen. The valuation analysis should only be completed by an accredited business appraiser and is central to meeting the value gap and replacing income.
4. Succession Planning
Succession planning requires you to consider how to replace yourself in the business with a strong management team. You must be instrumental in moving them into a team made of champions, one with strong leadership for the next business generation and can establish a vision for the future.
Ideally, this should be an ongoing process so that when you’re ready, the final transition can take place in three years.
5. Financial Planning
Financial planning is the process of replacing your income and meeting your post-exit lifestyle needs. It will be critical for you to understand your income needs outside of the business and create a plan for not outliving your money.
For many business owners, there is a substantial “gap” or shortfall in the amount of investable assets they have versus what they need to replace that business income. The business will be the main catalyst for filling that gap. Once the business is monetized, it is up to the financial planner to assist you in protecting the principal while achieving the required rate of return you expect.
6. Estate Planning
Estate planning addresses how you will transfer your wealth to the next generation in a tax-efficient manner. Due to recent tax law changes, the lifetime exemption has increased substantially, putting many owners outside of any estate tax exposure.
For those individuals, estate planning should focus on protecting the wealth and determining the best possible method for transferring the wealth to family members. This area of planning is always a point of discussion, as the large exemption amount provided to individuals will sunset, meaning it will revert back to the $5 million exemption that was in place prior to the Tax Cuts and Jobs Act of 2017. Careful attention should be given to your individual situation to determine whether the sunset provision will create a taxable estate.
7. Tax Planning
Tax planning addresses the tax implications to you, the buyers, the business and the estate. Tax planning for the exit is a critical part of the business transfer, as you could potentially see tax exposure on the sale of your business of over 55 percent.
Entity structure will also be a critical aspect of tax efficiency when planning for the exit. While the C corporation tax rates have been significantly reduced, there could be situations where the transaction will incur a double taxation, causing the tax bill to be greater than the seller’s harvest — or Uncle Sam getting more than you in the largest financial event of your life. Your plan should strongly consider the available options and understand the tax consequences of each alternative.
Most contracting companies exit internally with a management buyout and, in some cases, an employee stock ownership plan. The good news is these exits provide the most flexibility and opportunity to reduce the tax burden. Remember, it is not how much you receive, but how much you keep.
8. Emotional Attachment
While a less traditional “discipline,” you must also consider and address issues of emotional and financial attachment to your business during the exit planning process. If you’re having difficulty trying to figure out how much money you need from the company in order to maintain the post-exit lifestyle you desire, it will be almost impossible to see yourself outside the business.
For many owners, their business is “their baby,” so the emotional attachment is very real and very strong. Until they can see themselves outside of the business and determine how they will spend their time outside of the business, they will continue to be “stuck” in the business.
Most advisers are not trained to measure and understand this level of emotional attachment to the business. An exit planner can coach you in this area.
My experience has shown that an owner can’t let go until they have a clear vision of their financial future that is revealed in the exit plan. Then they can envision their retirement date and leading their legacy with a dedication to the succession process to replace themselves, and life, outside the business.
Understanding these eight disciplines will help you prepare for the complicated exit process and ensure your legacy for your spouse, family and company.