This document outlines key considerations for business owners planning their exit from their company. It discusses three universal exit goals: achieving financial security, choosing a departure date, and finding the right successor. The concept of "transferable value" or the value of the business without the owner is explained. Ways to build value include improving management, systems, growth strategies and competitive advantages. Potential exit paths like sale to employees or family, or to a third party are compared based on factors like financial security, taxes and the successor. The importance of preservation of value after exiting is also covered.

1. Small Group Counseling – Exit Strategy:
Planning for Your Retirement
Women’s Enterprise Development Center
Ted Zink, Partner -- McCarthy Fingar LLP
July 29, 2016

2. INTRODUCTION
• WILL COVER THE FOLLOWING TOPICS
– THREE “UNIVERSAL” EXIT GOALS
– YOUR “GAP”
– THE CONCEPT OF “TRANSFERABLE VALUE”
– BUILDING TRANSFERABLE VALUE AND CLOSING THE
“GAP”
– EXIT PATHS
– POST-EXIT INVESTMENT AND PRESERVATION OF
VALUE
– SOME “NEXT STEPS”

3. BACKGROUND
• YOUR EXIT IS “INEVITABLE”
• 7 OUT OF 10 BUSINESS OWNERS WANT TO
EXIT THE BUSINESS WITHIN THE NEXT 10
YEARS
• ONLY 1 OUT OF 10 HAVE A WRITTEN PLAN ON
HOW TO EXIT

4. INTRODUCTION
• PERHAPS THE MOST SIGNIFICANT
TRANSACTION OF YOUR FINANCIAL LIFE
• IF NOT PREPARED (THE “BIG THREE”)
– CAN’T LEAVE WHEN YOU WANT
– WITH THE MONEY YOU NEED
– OR LEAVE THE BUSINESS TO THE PERSON YOU
CHOOSE

5. INTRODUCTION
• THE IDEAL
– LEAVE THE BUSINESS TO THE SUCCESSOR OWNER
YOU’VE CHOSEN
– ON THE DATE YOU’VE PICKED
– WITH ENOUGH MONEY TO SATISFY YOUR NEEDS
AND WANTS FOR THE REST OF YOUR LIFE

6. INTRODUCTION
• IMPORTANCE OF PLANNING
• WHAT IF SOMEONE OFFERED YOU $2 MILLION
FOR YOUR BUSINESS NEXT WEDNESDAY?

7. INTRODUCTION
– DO YOU REJECT THE OFFER BECAUSE YOU
CANNOT EVALUATE ITS MERITS -- AND RUN THE
RISK THAT THE OFFER IS THE ONLY ONE YOU WILL
EVER RECEIVE?
– EXIT IS NOT AN ISOLATED EVENT – IT IS A
DYNAMIC PROCESS THAT CAN TAKE 2 TO 3 AND
PERHAPS AS LONG AS 10 YEARS

8. INTRODUCTION
• THINK OF THE EXIT PROCESS IN THREE STEPS
STEP ONE: BUILD VALUE
STEP TWO: MONETIZE VALUE
STEP THREE: PRESERVE VALUE

9. INTRODUCTION
• ASSESS WHAT FINANCIAL RESOURCES YOU
HAVE NOW
– THE BUSINESS ITSELF
– PERSONAL ASSETS
– DETERMINE WHAT YOU’LL NEED IN RETIREMENT
– COMPARE WHAT YOU HAVE TO WHAT YOU’LL NEED
– THE DIFFERENCE IS YOUR “GAP”
– YOU WANT TO CLOSE THE GAP

10. INTRODUCTION
• GOALS EVERY0NE HAS (UNIVERSAL)
– ACHIEVING FINANCIAL SECURITY OR
INDEPENDENCE
– DEPARTURE DATE – LEAVING THE BUSINESS AT
THE RIGHT TIME FOR YOU – AND THE BUSINESS
– FINDING THE RIGHT SUCCESSOR OWNER

11. FINANCIAL SECURITY
• CONTINUE WITH YOUR CURRENT LIFESTYLE?
• OR SOMETHING MORE?
• IN A PERFECT WORLD: ACHIEVE FINANCIAL
INDEPENDENCE NO LATER THAN THE DATE
YOU GIVE UP CONTROL OF THE BUSINESS

12. FINANCIAL SECURITY
• HOW MUCH $$ DO YOU WANT?
• WANT VERSUS NEED
• FINANCIAL PLANNER CAN HELP YOU
DETERMINE WHAT YOU NEED (THE
IMPORTANCE OF WORKING WITH A
FINANCIAL PLANNER NOW)

13. DEPARTURE DATE
• MAY BE SECONDARY TO ACHIEVING
FINANCIAL INDEPENDENCE
• DETERMINES, IN PART, YOUR ROADMAP TO
EXIT
• HOW LONG DO YOU HAVE TO BUILD THE
VALUE YOU NEED?

14. DEPARTURE DATE
• MANY VARIABLES
– TAX INCREASES
– ECONOMIC RECESSION
– HEALTH
– RESIGNATIONS OF KEY EMPLOYEES
– CHANGES IN CONSUMER TASTES AND
TECHNOLOGY

15. DESIRED SUCCESSOR
• CHILDREN?
• OTHER FAMILY MEMBERS?
• KEY EMPLOYEES?
• THIRD-PARTY BUYER?

16. DESIRED SUCCESSOR
• SOME THINGS TO CONSIDER WHEN CHOOSING
TO WHOM YOU WANT TO LEAVE THE BUSINESS
– FAMILY HARMONY
– YOUR LEGACY
– ACKNOWLEDGING EMPLOYEES
– TAKING BUSINESS TO NEXT LEVEL
– MAINTAIN CULTURE
– COMMUNITY INVOLVEMENT
– QUALITY RETIREMENT

17. SOME GENERAL RECOMMENDATIONS
• DON’T POSTPONE PLANNING UNTIL ALL
GOALS ARE SET IN STONE
• AS YOU GAIN CLARITY, YOU MAY WANT TO
CHANGE YOUR GOALS
• CONSIDER ASSEMBLING A TEAM OF
PROFESSIONALS TO HELP

18. POSSIBLE TEAM MEMBERS
• VALUATION EXPERT
• MANAGEMENT CONSULTANT
• INVESTMENT BANKER/BUSINESS BROKER
• TAX SPECIALIST (CPA OR LAWYER)
• TRANSACTIONAL LAWYER
• TRUST AND ESTATES LAWYER
• PERSONAL FINANCIAL PLANNER
• PUBLIC RELATIONS SPECIALIST

19. KEY CONCEPT
• “TRANSFERABLE VALUE”
• TRANSFERABLE VALUE IS WHAT
YOUR BUSINESS IS WORTH, TO
SOMEONE ELSE, WITHOUT YOU
• TRANSFERABLE VALUE IS THE PRINCIPAL
DETERMINANT OF YOUR SUCCESSFUL EXIT

20. BUILD VALUE TO CLOSE THE “GAP”
• HOW TO INCREASE:
– TRANSFERABLE VALUE
– CASH FLOW
– EBITDA

21. VALUE DRIVERS
• TRANSFERABLE VALUE IS A FUNCTION OF
TWO KEY NUMBERS:
– EBITDA, AND
– MULTIPLE (USUALLY 4 TO 7 TIMES FOR
BUSINESSES WITH REVENUES BETWEEN $5 AND
$150 MILLION; 2 TO 3 TIMES FOR BUSINESSES
WITH LESS THAN $5 MILLION)

22. VALUE DRIVERS
• EBITDA = EARNINGS BEFORE INTEREST, TAXES,
DEPRECIATION, AND AMORTIZATION
• MULTIPLE IS FUNCTION OF THE NUMBER AND
STRENGHT OF “VALUE DRIVERS” YOUR
BUSINESS HAS

23. PRIMARY VALUE DRIVERS
• NEXT-LEVEL MANAGEMENT
• OPERATING SYSTEMS THAT INCREASE
SUSTAINABILITY OF CASH FLOWS
• DIVERSIFIED CUSTOMER BASE
• PROVEN GROWTH STRATEGY
• RECURRING REVENUE
• GOOD AND IMPROVING CASH FLOW
• DEMONSTRATED SCALABILITY
• COMPETITIVE ADVANTAGE
• FINANCIAL PREDICTABILITY AND CONTROL

24. NEXT LEVEL MANAGEMENT
• CAN YOUR EXISTING MANAGEMENT TEAM
TAKE THE BUSINESS TO THE NEXT LEVEL?
• IF NOT, CONSIDER IMPROVING MANAGEMENT
TEAM WITH DEMONSTRATED TALENT
• ATTRACT AND RETAIN NEXT-LEVEL
MANAGEMENT
• MANAGEMENT CONSULTANTS TO ASSESS AND
TRAIN

25. OPERATING SYSTEMS
• E-MYTH REVISTED (BUILD A FRANCHISE)
– REPEATABLE AND STANDARDIZED PROCESSES AND
SYSTEMS IN ALL ASPECTS OF THE BUSINESS TO
ENABLE SCALING WITHOUT SIGINFICANT
ADDITIONAL INVESTMENT

26. DIVERSIFIED CUSTOMER BASE
• NO SINGLE CLIENT ACCOUNTS FOR MORE
THAN 10% OF SALES
• AVOID CUSTOMER CONCENTRATION
• CONSIDER NEW AND PROFITABLE MARKETS

27. PROVEN GROWTH STRATEGY
• WRITTEN PLAN ON HOW TO ACHIEVE
GROWTH GIVEN INDUSTRY DYNAMICS AND
DEMAND FOR YOUR COMPANY’S PRODUCTS
• NEXT-LEVEL MANAGEMENT AND PROVEN
GROWTH STRATEGY PARTICULARLY
POWERFUL
• OUTSIDE CONSULTANT TO IMPROVE SALES
FUNCTION

28. RECURRING REVENUE AND PRODUCTS
RESISTANT TO COMMODIZATION
• RECURRING REVENUE IS A HIGHLY VALUED
DRIVER FOR ANY BUSINESS
– DETERGENT VS. WASHING MACHINE
– RAZOR BLADES VS. ELECTRIC RAZOR
– “TOLL BOOTH’ TYPE BUSINESS
• PRICING MARGINS RESISTANT TO
COMMODIZATION
– BUYERS WILL PAY MORE FOR DIFFERENTIATED
PRODUCTS

29. DEMONSTRATED SCALABILITY
• MAINTAIN AND IMPROVE PROFITABILITY AS
REVENUE INCREASES
• BUYERS DEMAND SCALABILITY BECAUSE THEY
ARE ONLY INTERESTED IN BUYING BUSINESS IF
THEY BELIEVE IT CAN GROW WITHOUT
SIGNIFICANT ADDITIONAL INVESTMENT
• FOR EXAMPLE “SEE’S CANDY”

30. COMPETITIVE ADVANTAGE
• WHY YOUR CUSTOMERS BUY FROM YOU
INSTEAD OF FROM YOUR COMPETITORS
• COMPETITIVE ADVANTAGE IS BEST
DEMONSTRATED BY HIGH GROSS MARGIN IN
RELATION TO YOUR COMPETITORS
• DON’T WANT TO COMPETE ON PRICE ALONE

31. COMPETIVE ADVANTAGES
• EXAMPLES OF COMPETITIVE ADVANTAGE
– UNIQUE PRODUCT OR SERVICE
– PATENT
– TRADEMARK
– EXCLUSIVE ACCESS TO NECESSARY RAW MATERIAL
– EXCLUSIVE ACCESS TO IMPORTANT DISTRIBUTION
CHANNELS
– PERMIT
– FRANCHISE

32. FINANCIAL PREDICTABILITY AND
CONTROLS
• THE IMPORTANCE OF RELIABLE FINANCIAL
REPORTING, WITHOUT WHICH BUYERS WILL
NOT BE INTERESTED
• NEED CONTROLS SO THAT GROWTH DOES
NOT CONSUME THE BUSINESS

33. EXIT PATHS
• SALE TO MANAGEMENT TEAM OR CO-OWNER
(MOST COMMON)
• TRANSFER TO CHILDREN (VERY FEW BUSINESSES
SURVIVE A TRANSITION TO THE NEXT
GENERATION)(START EARLY GETTING YOUR HEIRS
INVOLVED)
• SALE TO THIRD-PARTY BUYER
• ESOP
• SHUTTING DOORS AND LIQUIDATING BECAUSE
YOUR COMPANY IS NOT TRANSFERABLE

34. CRITERIA ON WHICH TO ASSESS THE
RELATIVE MERITS OF VARIOUS EXIT PATHS
• FINANCIAL SECURITY
• TIME FACTOR
• TIME MARGIN
• TAX CONSEQUENCES
• VALUE BASED GOALS
• SUCCESSOR

35. FINANCIAL SECURITY
• STRUCTURE FLEXIBILITY
• ABILITY TO CONTINUE TO REAP BENEFITS AND
SHARE IN GROWTH PENDING
CONSUMMATION
• MANAGEMENT BUY-IN, ENTHUSIASM AND
MOTIVATION TO ACCELERATE VALUE
CREATION

36. TIME FACTOR
• LENGTH OF PHASE OUT AND ISSUES THAT CAN
ARISE BEFORE CONSUMMATION
• OPTIONALITY

37. TIME MARGIN
• DOES THE PATH ALLOW YOU TIME TO SCALE
BACK AND REALLY CONSIDER YOUR POST-EXIT
OPTIONS?
• DOES PATH ALLOW MANAGEMENT TIME TO
ADJUST TO THE NEW “STATUS QUO?”

38. TAX CONSEQUENCES
• OFTEN THE KEY CRITERION

39. VALUE-BASED GOALS
• LEGACY AND CULTURE
• BENEFITS TO EMPLOYEES
• FAMILY HARMONY

40. SUCCESSOR
• MAY BE THE MOST SIGNIFICANT AND
DIFFICULT DECISION

41. ASSESSMENT
Transfer to
Insiders
Transfer to
Family
Sale to Third
Party
Sale to ESOP
This method
appeals to me
because:
This method might
be appropriate for
my business
because:
This method might
be appropriate for
me because:
This method is only
appropriate under
the following
conditions:
This method is
inappropriate for me
and my business
because:

42. RANKING THE EXIT PATHS
Transfer to
Insiders
Transfer to
Family
Sale to Third-
Party
Sale to ESOP
Financial
Security
The Time
Factor
The Time
Margin
Tax
Consequences
Value-Based
Goals
Successor

43. PRESERVING VALUE
• FINANCIAL PLANNER CAN OFTEN PROVIDE
INVALUABLE ASSISTANCE IN HELPING YOU
ACHIEVE FINANCIAL GOALS
• “PRESERVATION” IS THE KEY

44. NEXT STEPS
• IMPROVE THE ACCURACY AND TIMELINESS OF YOUR RECORD-
KEEPING
• TRANSFORM YOUR COMPANY’S REVENUE STRUCTURE INTO A
RECURRING REVENUE MODEL
• REFRAIN FROM TREATING YOUR COMPANY AS AN ATM FOR
PERSONAL AND FAMILY EXPENSES
• REDUCE CUSTOMER CONCENTRATION
• ELIMINATE WASTE AND INEFFICIENCY IN COMPANY’S OPERATIONS
• BUILD A STRONG TEAM OF MANAGERS
• CREATE SYSTEMS AND PROCEDURES
• GET YOUR CORPORATE MINUTES AND RECORDS UP-TO-DATE AND
COMPLETE
• CREATE A REALISTIC AND ACHIEVABLE GROWTH STRATEGY
• MAKE YOURSELF EXPENDABLE

45. ACKNOWLEDGMENT
• “EXIT PLANNING: THE DEFINITIVE GUIDE”
SELL YOUR BUSINESS WHEN YOU WANT, FOR THE MONEY YOU NEED, TO THE PERSON
YOU CHOOSE
JOHN H. BROWN
CEO OF BUSINESS ENTERPRISE INSTITUTE

46. ADDITIONAL RESOURCES
• WALK AWAY WEALTHY – THE
ENTREPRENEUR’S EXIT PLANNING PLAYBOOK,
by Mark M. Tepper