The Contractor’s 60 Minute Exit Plan – How to Cash Out, Eliminate Taxes and Retire Comfortably
CHAPTER 1: There’s Only One Guarantee – Part 1
There are no guarantees in owning and managing your business, except one: you will eventually exit. Whether you exit voluntarily or involuntarily, the day will come when you will say goodbye.
To ensure that your inevitable exit is a successful one — an exit that will deliver on your future financial, personal and business goals — you need an exit plan.
This chapter introduces the multi-faceted exit planning process, from valuation to succession planning, and presents the transfer options available to roofing contractors in ownership. It also takes a closer look at the risks, challenges and stakes involved in a business exit.
What prompts an owner’s exit? In the best scenarios, an owner will choose voluntarily to depart the business, perhaps to enter retirement or start a new venture. An owner also might be confronted with a forced or involuntary departure from the business due to death, disability or divorce. No matter the reason for an exit, planning for the inevitable is essential. The stakes are too high to ignore.
Numerous people depend on a business as a source of economic benefit, beginning with the owner and the owner’s family. Statistically speaking, an estimated 75 percent of a business owner’s wealth is trapped in their non-liquid business, according to estimates from PricewaterhouseCoopers. At Beacon Exit Planning, we have encountered many customers whose percentage of wealth in the business is much higher — in some cases as high as 92 percent. The primary reason for planning is to provide the owner with financial security to protect that wealth.
The exit plan also seeks to protect the other parties who rely on the business, such as employees and their families. In some cases, the business’ reach might extend even further. Perhaps a community depends on a business for financial support.
To ensure a successful exit that continues to meet the needs of the owner, the family and the employees, an owner must find a way to transfer the business to a new generation.
A contractor owner will have several options to transition a business to new ownership. Voluntarily, the business owner can sell to a strategic or investment-minded buyer, or the seller can transition the business to employees, family members or key members of the organization. Because of the inherent characteristics of a construction company, the transaction typically involves a sale to family members or employees. This is called an internal sale.
External sales — either to strategic buyers or investment firms — are less common in the construction industry. Construction companies are hard to sell. Outside buyers typically see too much risk. Unless the owner structured the company in a way that generates quality cash flows, the most likely buyer to see value in a contracting firm will be someone who already works for the business.
Other transfer options include gifting and an employee stock ownership plan, or ESOP. Gifting, generally an option for family businesses, isn’t a monetary transaction, but is used more as an efficient way to transfer wealth between family and generations. Meanwhile, an ESOP is essentially a retirement plan where the plan trust buys corporate stock as opposed to other marketable securities typically found in more traditional retirement plans, such as profit sharing and 401(k) plans. Because the trust operates for the benefit of the employees’ retirement, the ESOP qualifies under the Employee Retirement Income Securities Act or ERISA and is under the oversight of the Department of Labor and the Internal Revenue Service. An ESOP can be a very tax efficient tool for exiting a business.
The Exit Plan
Transitioning the ownership and management of a company to new ownership, whether from inside or outside of the business, is challenging and can take years to complete. Exit planning will help an exiting owner implement strategies that will increase the odds of success.
The exit plan asks an owner to outline their future financial goals of the transaction. This generally involves the owner finding a way to monetize the business so they can replace their income once they leave the business.
The plan also asks an owner to look at their future personal goals and their future goals for the business. In other words, what will the owner do, and what will happen to the company, once the owner has departed?
A properly written exit plan shouldn’t stop there. A properly drafted exit plan should include strategies and tools to manage financial risk. It should coordinate the owner’s goals with the necessary legal documents and protect the business from unintended consequences such as predatory lawsuits or economic downturns.
An owner also must consider the various disciplines that go into the exiting process. During execution of an exit, a typical team will consist of corporate attorneys, estate planning attorneys, accountants, financial planners, life insurance agents and business appraisers. If an owner is looking to transition with some sort of specialty area such as an ESOP, he or she may need additional advisors such as ESOP attorneys or business brokers or investment bankers. Without a plan, this can become quite expensive for the exiting owner.
Exit planning can take about six months to a year or more to put into action.