How to Leave Your Business in Style

“A business exit planning strategy is a written roadmap to keep business owners on track and to encourage them to think this important process through,” said David Umbaugh, attorney at law. Umbaugh presented “Business Exit Planning – Leaving Your Business in Style,” at the Ohio Landscape Association’s WinterGreen Expo and Conference at the IX Center in Cleveland, Ohio, Feb. 15.

Seven steps are necessary for a business owner to successfully leave his or her business while maximizing its value, Umbaugh said. Step one focuses on establishing the business owner’s key objectives. These include the expected date of exit, the financial requirements that will be necessary upon exit and determining who the likely buyer will be, usually a third party, an employee or a family member. This step usually requires the owner to create a personal financial plan and to appoint an experienced advisor who will oversee the process as it unfolds.

Step two determines the value of the business, which is one of the most important steps in maximizing the profit the owner will receive upon exit, and a business evaluation expert is usually involved. “Business owners are notoriously wrong about how much their business is worth,” Umbaugh said. “Quick formulas do more harm than good, and are more wrong than right. The ability to properly assess a business is a unique skill done by a professional.”

Umbaugh stresses the importance to know both the minimum and maximum value of the business because of tax purposes.

Step three describes the specific steps that the business will take to enhance its value in the months or years leading to the sale date, as well as methods to preserve the value already created. Umbaugh suggested cleaning up the “legal skeletons” that can drive down the value of a business if uncovered by a potential buyer, such as sexual harassment suits, outstanding debts and unfinished company policies. This step will also implement tools designed to retain and motivate key employees, such as accruing annual bonuses, so the business will not diminish when the owner leaves. “If you leave your business and you are the only value, you won’t have a good sale,” Umbaugh said. “Leave behind some key employees that can help carry the business forward even when you’re no longer there.”

Steps four and five are interchangeable and determine who the business will be sold to. Step four focuses on the sale to a third-party buyer, usually by the use of a business broker or investment banker. Step five focuses on the sale to an employee or family member. In this type of sale, the double taxation inherent in the typical sale process is usually minimized.

Step six plans for the unexpected demise or disability of the business owner before he exits the business. In this situation, a “buy-sell” agreement may come into play, where one or more co-owners take responsibility of the business which is funded by a life insurance policy. If the business owner is the sole owner, a “stay-put” bonus for key employees may be used, and a letter of instruction to the surviving spouse or family members will be issued to explain how to sell or liquidate the business.

The last step, step seven, calls for proper estate planning to secure the value achieved by the successful exit. This is usually done in the form of trusts. “This step makes sure the value is transferred effectively and wisely to protect your loved ones now and in the future,” Umbaugh said.

To hear Umbaugh discuss his seven steps, listen to this Lawn & Landscape podcast – http://www.gabcast.com/index.php?a=episodes&id=1793.

To hear another podcast from the OLA’s WinterGreen Expo, visit http://www.gabcast.com/index.php?a=episodes&id=1793. Kathy Stokes-Shafer discusses how and why landscape designers can be environmentally friendly.