The Wealth Spa

Exit Plan: ‘Cause I guarantee you won’t live forever …

Posted on 29. Sep, 2008 by Elizabeth Potts Weinstein in Legal

Why Do You Need an Exit Plan?

A few of you may be running this business to sell or go public, and if so, you have already (hopefully) created your exit plan.  But the rest of you may not have created an exit plan because you don’t yet want to retire or your retirement seems too far away for a specific plan.  

As a business owner, you love what you do.  You quit your job to open this venture, and plan to run it indefinitely.  Perhaps you want to work a few less hours, but you don’t see a deadline for quitting.  Perhaps this is even your retirement business, where you retired to from your high-stress job to open your new venture in mid-life.

Regardless, you must have a plan for possible exits because I can guarantee you will not run this business forever.  You may change your mind.  You may want a sabbatical or to go on a book tour.  You may need to take a leave of absence to take care of a sick family member.  You may become physically unable to work.  And, I predict that you will not live until the end of time.  For all of these scenarios, you need a plan to give you the financial freedom to make the choices you need for your life.  

And that exit plan is not just for you.  Who else is affected by your business?  Your family, business partners, investors, creditors, employees, independent contractors, vendors, customers and clients.  This universe of individuals and other businesses depend upon your business income and continued existence, and you must have plans in place in case you can’t or don’t want to run things.  

Even if you have funded your exit plans through passive revenue streams, business equity, retirement plans, and other investments, you should structure your business and agreements to make any transition as smooth and inexpensive as possible for yourself, your family, and your business.  

#1 – Best Practices & Procedures

The simplest and often-forgot first step for creating an orderly exit plan is putting procedures on paper and documenting your business strategies.  Download the business procedures in your brain into a manual or handbook, so if you were no longer around, someone else could run the business using your step-by-step plan.  Use files names that someone else could interpret.  Write down your passwords and login information in a secure location, so another person could get into your computer files and online bank accounts.  

If you are solo, you may use this new procedures handbook just for yourself or if you sell your business.  When you are ready to bring on an assistant or groom an associate to work with you, this handbook is your teaching manual to delegate tasks and projects to your new staff.  

The more you are removed from your business, the easier it will be for someone to take over if you were not around, and the more money you will be able to get in a sale.  The more your business’ income comes from the sale of products, memberships, and other passive revenue streams, the more it is worth to an outsider.  So as you are creating passive revenue streams and delegating, know that these practices are also increasing the value of your business, and making your exit that much easier.  

#2 – Succession & Contingency Plan(s) 

Your Contingency Plan is your Sudden Exit Plan.  If you disappeared yesterday, how could someone take over and run your business, or at least organize everything for an orderly liquidation or sale.  This plan may also contain steps to deal with emergencies, including natural disasters. 

Your Succession Plan is your Orderly Exit Plan.  When you leave, what’s the plan for what happens with your business?  Right now this may be just what you want to happen, but it may change over time as you find partners, employees or younger professionals who you want to groom to take over, or other colleagues who may want to purchase your business.  As your business matures, you can formalize your plans into Buy Out Agreements with your business partners.  

#3 – Buy-Out Agreements

If you have partners, or are grooming an associate to buy you out, consider executing a formal buy-out agreement now, both as a Sudden Exit Plan and an Orderly Exit Plan.  This buy-out agreement should specify a calculation for the value of each partner’s share of the business, and what should happen in case of a partner passing away, becoming disabled, or retiring from the business.  It will also plan for the tax consequences of the sale.  

If you enter into this agreement now, including a calculation, formula, or procedure to determine the buy-out price, it will make the transition exponentially smoother in a difficult situation.  

In some industries, such as law, medicine, and dentistry, when a professional is 5-10 years from retirement, they commonly bring on a young practitioner to groom for buy out.  As the younger practitioner develops relationships with the clients or patients, they put together an agreement to buy out the older professional over a period of years. 

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Tags: buy-out agreement, contingency plan, exit plan, financial freedom, Passive Revenue Streams, retirement, retirement plan, succession plan