Exit planning

Exit planning is the preparation for the exit of an entrepreneur from his company to maximize the enterprise value of the company in a mergers and acquisitions transaction and thus his shareholder value, although other non-financial objectives may be pursued including the transition of the company to the next generation, sale to employees or management, or other altruistic, non-financial objectives.[1] Exit planning differs from succession planning in that the later is a sub-component of exit planning, and refers to the hiring, training and retention of a successor President/CEO of the company in a planned manner.[2] Succession Planning is but one of the many considerations when conducting exit planning.[3] Company owners commonly do not see their company from the standpoint of a potential buyer, and thus, ignore the strategic management of the company.[4]

However, other authors define exit planning in a broader sense. For example, Business Exit Planning is the process of explicitly defining exit-related objectives for the owner(s) of a business, followed by the design of a comprehensive strategy and road map that take into account all personal, business, financial, legal, and taxation aspects of achieving those objectives, usually in the context of planning the leadership succession and continuity of a business. Objectives may include maximizing (or setting a goal for) proceeds, minimizing risk, closing a Transaction quickly, or selecting an investor that will ensure that the business prospers. The strategy should also take into account contingencies such as illness or death.[5]

Company owners commonly do not see their company from the standpoint of a potential buyer, and thus, ignore the strategic management of the company. To achieve their desired outcomes, business owners often focus their attention on exit planning from the beginning of the investment, in order to prepare adequately for trade and financial sales, make effective use of the buy back option, market their businesses more widely for sale, use intermediaries and get the support of management[6] Significant value is lost due to an absence of or inadequate exit planning. Roughly 30% of businesses will be transferred to family member in some manner, 18% intend to sell to its employees, and many will simply be closed.[7] Up to one-third of businesses that are closed were successful at their termination[8]

The three sources of enterprise value in a company are firstly the value of its tangible assets, and secondly the value of its intellectual capital (intangible assets), which consist of human capital, relational capital, and structural capital (including is subcomponents organizational capital, innovation capital and process capital. Most of a middle-market company's and lower middle market company's value is derived from its relational capital, specifically, its customer relationships.[9][10] SMEs, also referred to as middle market companies, create innovation capital (part of structural capital).[11]

Most small-to-medium-sized businesses use a boutique investment bank to market their company in a mergers and acquisitions transaction to potential buyers. Some boutique investment banks also offer exit planning preparation, while certain consulting firms offer one or more of the services needed to conduct exit planning, such as human resources, in connection with succession planning.

Private Equity Groups are common acquirers of middle market businesses, whether as Platform companies or add-on or tack-on acquisitions.

In addition to business aspects, personal considerations need to be taken into consideration, including considerations about estate taxes, capital gains taxes, or other taxes.[12]

References
  1. Kupferman, Martin (2002-12-23). "Savvy exit strategies for mid-sized companies". Journal of Corporate Accounting & Finance. 14 (2): 9–12. doi:10.1002/jcaf.10130. ISSN 1044-8136.
  2. Sharma, Pramodita; Chrisman, James J.; Chua, Jess H. (2003-03-01). "Succession Planning as Planned Behavior: Some Empirical Results". Family Business Review. 16: 1–15. doi:10.1111/j.1741-6248.2003.00001.x.
  3. Hawkey, John (2002). Exit Strategy Planning: Grooming Your Business for Sale Or Succession. Gower Publishing, Ltd. ISBN 978-0-566-08498-0.
  4. Kuhn, Robert Lawrence (1996). "Building Value into the Entrepreneurial Company". In Matthews, Jana (ed.). Leadership and Entrepreneurship: Personal and Organizational Development in Entrepreneurial Ventures. Greenwood Publishing Group. p. 127. ISBN 978-1-56720-043-0.
  5. Nemethy, Les (2011). Business Exit Planning: Options, Value Enhancement, and Transaction Management for Business Owners. John Wiley & Sons. ISBN 978-1-118-02297-9.
  6. Wall, John; Smith, Julian (1997-11-30). "Better Exits" (PDF). The Journal of Private Equity. 1 (2): 31–43. doi:10.3905/jpe.1997.409667. ISSN 1096-5572.
  7. Holaday, David W. (2006). "Exit Plans for Financed Life Insurance: Preparing to Cross That Bridger before Coming to It". Journal of Practical Estate Planning. 8: 15.
  8. Marks, Mitchell Lee; Vansteenkiste, Ronny (2008). "Preparing for organizational death: Proactive HR engagement in an organizational transition" (PDF). Human Resource Management. 47 (4): 809–827. doi:10.1002/hrm.20246. ISSN 0090-4848.
  9. Welbourne, Theresa M.; Pardo-Del-Val, Manuela (2009). "Relational Capital: Strategic Advantage for Small and Medium-Size Enterprises (SMEs) Through Negotiation and Collaboration". Group Decision and Negotiation. 18 (5): 483–497. doi:10.1007/s10726-008-9138-6.
  10. Lervik, Elisabeth (2006). Relational capital: A study on its importance, quantification and its impact on business sectors and markets (Masters thesis). University of Oslo. hdl:10852/17777.
  11. Susman, Gerald; Warren, Anthony; Ding, Min; Stites, Jenna P (2006). "Product and service innovation in small and medium-sized enterprises". Research Sponsored by United States Department of Commerce-The National Institute of Standards and Technology Manufacturing Extension Partnership. S2CID 212618078.
  12. Foster, Gregory L. "Estate Tax Issues for The Family Owned Business". fambusiness.org. Archived from the original on 2011-08-31. Retrieved 2019-09-24.
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