Exit Planning Opportunities
How CPAs can provide valuable counsel to their current and prospective clients along the road to a successful exit.
November 1, 2010
Our CPA practice has experienced increasing opportunities to work with owners and management of closely held businesses to address their exit strategies, a rather broad term that seems to have replaced what we used to call, for the most part, succession planning. As the baby boomer generation continues to age, many are now more focused on how to make graceful exits as opposed to being more concerned with a succession of the enterprise they may have been part of establishing or have seen flourish over the last half century-plus of post-WWII expansion.
Our firm has a particular interest in broadening our emphasis and capabilities in this niche, stemming from related expertise we have in business appraisal, strategic planning and wealth management and harvesting. While we have had several instances of assisting individuals and entities in buy-side assistance, most often we are engaged on the sell side of a possible exit strategy, working with owners and senior management to provide assistance on various aspects, including assessing value, financial modeling and assessing the related tax attributes associated with one or more alternative exit driven alternatives.
Taking a holistic view of the possibilities, we have come to realize that there are many seller-side hurdles to overcome, especially in today’s turbulent economy. These challenges can include:
In many instances, a qualified CPA advisor is in the best position to offer advice to owners of closely held businesses on the realities of the choices they have, to best position their enterprise for eventual transition, even if it is something that may not occur for three years to five or more years. We are fond of telling our clients that the prolonged delay in an overall economic recovery is a great time to be working on their business as opposed to working in the business!
My 30 years in public accounting confirms that many closely held owners are extremely competent at their day-to-day challenges and are often the driving force behind why the business even exists. The valuation community has developed extensive literature and methodologies focused on the allocation of personal or professional goodwill, as compared to the goodwill associated with the enterprise. It is this personal element of goodwill that often hinders an owner of a closely held business from making an exit on terms that fulfill other important economic and noneconomic goals.
Typically the core decisions required to begin the process are centered on an assessment of the ability of the closely held owner to achieve their lifetime income goals. Many involved in estate planning for example, fail to fully comprehend the dynamic importance of this when dealing with owners of closely held businesses. Helping the closely held business owner to legitimately compare and contrast an internal deal among key employees versus a sale to a third-party can, in many instances, be the entrée to an exit-planning engagement. Getting their attention focused on the pros and cons of each alternative and whether an internal buy out is viable can greatly assist ownership to be realistic in setting their exit goals.
In creating a viable exit plan, owners need to quantify the net worth they will need to support the post-exit lifestyle they desire. Often the rub comes with the identification of the gap between post-exit lifestyle expectations and the true exit value “cash in the pocket” that can be realized. We routinely see owners who generally know there is a gap and defer dealing with it by saying they will address it “right after this major project,” “after our busy season” or “as soon as we deal with the current fire drill.” Our role is to work with these owners to create a timeline for them to deal with the gap analysis required to ultimately achieve the overriding objective of being able to leave their business in the style and on the terms that they desire, as opposed to being forced to compromise due to inadequate foresight and planning. There must be a commitment to establishing sustainable, enterprise-wide systems and an operating culture that fosters enterprise continuity and, in turn, realizable value.
When we are brought in or become involved in the assessment stage of the process, we often find that those desiring to eventually exit have not:
Depending on the nature of the business and the industry it operates within, any of the following can have a significant impact on the value of the enterprise:
The CPA advisor has ample opportunity to play a key role in assisting ownership on exit-planning objectives. In many instances they are the best candidate to quarterback the multi-disciplinary advisory team that is typically necessary to fully assist owners of closely held businesses to competently evaluate alternatives, evolve and eventually implement a logical plan. The CPA, as the owners most trusted advisor, can monitor progress throughout the time span from the initial assessment to the point that the owner has exited the business. In many engagements, it does not end with the sale of the business as there are often significant opportunities to be involved with wealth management and in providing counsel and support to the now-exited owner to move on to another phase of their life, whether that be retirement or a second career that many closely held owners seek either by choice or necessity. We have seen opportunities to assist owners who have exited their business to prospect for another business and acquire or buy into, as a means to fulfill their desire to take on new challenges and contribute.
View the graph to see a nice summary of the various areas in which CPA advisors can provide valuable counsel to their current and prospective clients along the road to a successful exit. This framework was developed by James Andersen of Calif.-based accounting firm Burr Pilger Mayer LLP.
Ronald L. Seigneur, CPA, ABV, CFF, MBA, ASA, CVA, Seigneur Gustafson LLP, Lakewood, Colo., along with James Andersen, CPA, ABV, CFF, ASA, of Santa Rosa, Calif.-based Blurr Pilger Mayer LLP, will be presenting an optional workshop at the upcoming AICPA National Business Valuation Conference, November 7-9, 2010, Washington, DC.