Succession - Planning Your Exit Strategy

By Clair A. Rood and Bob Gellman, CBIZ

May 8, 2014

Having a clear business exit strategy in place will allow you to focus on building your business toward specific, personal goals. Knowing how much you’ll need to fund your preferred lifestyle, when you will need it, and how you expect to transition out of your business will add clarity to your business plan and operating strategy. 

Does your succession plan include transitioning the business to family members? Considerations include: How the transition will be funded; Who will assume leadership; How control will be divided; How much control – if any – you want to retain; Protection of family assets; Family members who are not involved in the business; Implementing an exit strategy, if necessary, before your heirs are ready to take over the business; Involvement of other key employees and stakeholders.

While developing your exit strategy, whether through sale or transition, it’s important to understand what you will need in terms of economic resources, and what options will provide those resources. The value you MUST have to live without the business drives the value you MUST obtain when you transition out of your business. WHEN that value must be obtained, and HOW that value will be sustained, depends on your personal desires and is a key variable in the planning process. Being specific about how much your business must be worth and when you plan to transition out of your business adds clarity to your exit strategy and directs your business plan toward targeted growth objectives.

For many business owners, the amount they MUST have to be able to live without their business is an amount that will provide them with financial freedom for the rest of their lives.  A common definition of financial freedom is the economic resources required to allow us to do those things we want to do, when we want to do them (i.e., enough to fund your desired lifestyle and provide for others as you desire).

To determine what you will need in order to be financially independent, you must project your future lifestyle expenditures (in today’s dollars), inflation rates, taxes, and your sources of income.  Because your estimate of future expenses will drive your definition of financial freedom and ultimately the value you will need to derive from the sale or transition of your business, you will want to give it due consideration.  Consider your day-to-day living expenses, expenses currently born by the company, the cost of future big ticket items such as boats, cars, weddings, charitable commitments, and the cost of health care and unforeseen expenditures.

Your financial freedom will also depend on your future sources of income.  Once you sell or transition your business, your sources of income will depend largely on the investments you decide to make and the rate of return you can anticipate from these investments.  For planning purposes, it may be best to assume a conservative rate of return.  In reality, you will want to begin learning about investing to understand how best to develop the quantity and quality of your future sources of income.

To assess what financial freedom means to you in dollars and cents, it’s wise to work with an advisory team, including a CPA, attorney and financial planner who are all experienced at exit strategy planning. Plans that include a tailored tax analysis of the sale of your business interest or wealth transfer tax guidance and an assessment of other financial planning considerations, such as the structure of your estate plan, can get quite involved.

Once you understand the value your business must attain to provide for your financial freedom, the next question to ask is WHEN this value must be attained. 

The most common answer we hear in response to this question is “three to five years”.  No matter if it is three, five or twenty years, the typical answer primarily stems from non-financial considerations versus an assessment of how long it will take the business to attain the value necessary for your financial freedom.  If you are fortunate enough to operate a business that has attained its target value, your “when” can more easily be based on non-financial considerations.

To add clarity to your time frame decision, consider the value of your business today and the growth rate required to reach its target value. 

If you are not inclined to lower your targeted financial objectives, you will need to consider how to get the highest and best value for your business (after-tax) while you develop growth strategies to integrate value management into your business plan. 

Clair A. Rood, Jr. is the senior managing director of the CBIZ MHM, LLC Salt Lake City office. Rood is a CPA specializing in corporate taxation with a focus on minimizing clients’ tax burden and maximizing profitability. He can be reached at 801.364.9300 or">

Bob Gellman is a CPA specialized in assisting business owners define and integrate their personal dreams with their business objectives.  He is a Tax and Financial Services Director at CBIZ Nation Smith Hermes Diamond in San Diego, CA. Bob can be reached at"> and 858.795.2110.


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