Building on August's “exit strategies” column, I want to discuss the actual execution of the plan, based on my experience. Keep in mind that every situation is unique, so I will attempt to offer comments and suggestions that are applicable to all.

Accountants and lawyers are best equipped to help you with the financial options available for your best exit deal, and there is great advice and counsel out there. My focus is on you — the human element. You have decided to leave an environment that has provided you an identity and financial independence, and now you must transfer your ownership to a successor. How do you really feel about that? Are you sure you want to do this? How do you want to live your life post-exit? Only you can answer these questions; the accountants and lawyers can't.

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Steps to a successful exit

Pick a target date at least three years in the future. Five years may be even better. Your decision to exit may be based on several factors, such as age, health, feelings about the business, or a desire to “do something else.”

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1. Three years prior to the target date

Create a vision of what you want to do post-exit and commit it to writing. You have already stated your decision to “cash out,” so in this step you'll be stating your vision of what you intend to do with the money and how you want to live. If you don't have an idea for a vision statement, stop. Maybe you aren't ready.

Involve all owners and stakeholders in identifying every potential successor to your equity ownership. Prepare a spreadsheet of potential opportunities and establish the pros and cons of each, ending up with a prioritized list from best to worst. The most common opportunities can be:

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    • Internal: The business will continue and your equity will be purchased by the entity, other owners, family, key employees or a combination of these. You will need to share your exit strategy with each stakeholder to make sure it's something they want and will agree with.

    • External: Merge or be acquired by another business, sell to a bank or hedge fund or other type of financial company, or possibly align with a cluster arrangement.

Identify management succession and put the structure in place now. These people will play important roles during and after your exit, so involve them. After all, it's their futures, too.

Become familiar with what “due diligence” means and understand all of the criteria about your business that will be carefully scrutinized by any potential successor, buyer or partner. Be prepared to show two to three years of tax returns.

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You have decided to leave an agency environment that has provided you an identity and financial independence. Start planning now to transfer your ownership to a successor. (Photo: iStock)

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2. Two years prior to target date

Start cleaning up your financials, especially trust and operating accounts, company payables, loans and notes. Start reining in discretionary expenses and identify outside sub-produced business not owned by your agency.

Bring corporate books and records up to date, including minutes, resolutions, employee handbook, shareholder's agreements, buy/sell agreements, producer and employment contracts. Review all corporate insurance coverage, fund all qualified retirement plans — 401(k), IRAs and deferred compensation — to bring them current.

Review all resident and nonresident licenses, and also bring up to date agency and broker contracts to include transfer of ownership. Have job descriptions and performance evaluations for all employees, including executives and owners.

Consider having a professional valuation made of your business and establish the value of your stock or equity.

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3. One year prior to the target date

Using the established valuation, work with a tax advisor and an attorney to determine what is the most advantageous financial arrangement to maximize your value with the least taxable impact, such as a stock purchase, an asset sale or an earn-out.

Prepare a pro-forma, which is a re-statement of your expense budget after eliminating all discretionary expenses and that shows a more profitable earnings before interest, tax, depreciation and amortization (EBITDA) to potential successors. Understand why EBITDA is critical to your valuation.

While there is no perfect process to follow, the important thing to remember is to “plan the work” and “work the plan.”

Barry Seigerman is an independent broker/producer. Contact him at [email protected]. 

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