Change is happening in the professional services industry. Today, 51% of small business owners in the U.S. are age 55 or older. Based on demographics alone, the exit strategies for most of these business owners will come into play in the next 10 years. With an estimated total value of more than $6 trillion, the impending business transitions will be the largest generational wealth transfer in history.

For professional services firms, which often rely on the unique skills and reputations of their leaders, having a plan for how an owner will exit the business is critical. Mapping out the plan five to 10 years in advance gives business owners the time to explore more transition options. In contrast, compressing the planning process into a shorter window of time can significantly limit the business owner’s options and their ability to control their exit from the business they built.

Documenting an exit plan doesn’t lock you into a single option. Instead, doing the groundwork in advance can help prepare you for opportunities that may arise, such as selling or merging the firm with a third party. A documented plan also allows you to adapt the plan as your firm grows or your goals change.

So, where do you start? There are three basic phases to exit planning: discovery, preparation and decision.

Discovery Phase: Know Your Numbers

Before you make any decisions about how you want to transition your stake in the firm, you should work with a financial advisor to assess your finances and exit readiness from both business and personal angles.

Business Valuation: Many professional services firm owners don’t know the up-to-date market value of the business. Some overvalue a firm’s worth because they’ve invested so much into building it or they have difficulty separating their value from the firm’s value. Others may undervalue the firm, leaving money on the table if they elect to sell down the road.

Before you make any decisions about the type of exit you want to pursue, engage with business valuation experts to determine the firm’s current fair market value. A business valuation specialist will help you calculate the value of your business assets, including intellectual property. Most importantly, an independent valuation will identify opportunities to help enhance your firm’s value.

Personal Financial Planning: Creating a business exit strategy should be done in tandem with planning for your next personal chapter. Are you planning to invest in another firm or retire? How much money will you need to live? What do you want to leave to your heirs? What are your philanthropic goals? What are the tax implications if you decide to sell your stake in the business? Spend time thinking through your personal needs and goals. Discuss different scenarios with your financial advisor who can help you explore options, create financial projections and identify gaps.

Connecting the dots between your business and personal financial goals is essential. The Exit Planning Institute estimates that up to 90% of business owners have their personal wealth tied up in the company. In many cases, it’s a large part of the business owner’s identity. It’s critical to invest time during the discovery phase to assess what you want to do after exiting the business and the associated financial requirements.

Based on the discovery phase, you will pinpoint your goals for the company, identify preferred options for transitioning the business and determine what needs to be addressed before initiating your exit. Ideally, you’re planning well in advance, giving yourself time to implement key strategies, develop successors and accelerate the company’s value.

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Preparation Phase: Reduce Your Risk

Armed with the information gathered and goals determined during the discovery phase, it’s time to put a plan in place that prepares you and the company for the exit you envision. During the preparation phase, the focus is on working with your advisors and leadership team to “de-risk” your business and personal finances. By reducing risk, you increase the value of the business and the level of preparedness for exit. Even if you’re not planning to exit in the near term, having a plan and taking action to address gaps and risks in your strategy gives you more exit options and the flexibility to adapt as your situation changes.

Every exit strategy is unique. While there’s not a one-size-fits-all plan, your business and financial advisors can help you identify and mitigate risks, including:

• Reduce owner dependency. When an entrepreneur is the public face of the firm, their exit impacts everything — from the brand and customer relationships to operational processes and intellectual capital.
• Document strategies and processes. If too much of a firm’s strategy exists in an owner’s mind, the business is worth less to a potential buyer. A lack of documentation also makes it difficult for successors to take over and run the business successfully. During the preparation phase, document strategies, processes, operating agreements, strategic alliances and customer relationships.
• Make business improvements. Every firm has gaps that need to be addressed, whether in technology, operational processes or talent development. Considering the impact on the firm’s valuation and the owner’s exit plan can shift how business improvements are prioritized.
• Prepare successors. If your goal is to transition the business to an existing leader or family member, the preparation stage is the time to map out and execute a plan to transfer knowledge, build skills and provide opportunities to gain diversified experience. A documented succession plan, backed by an action plan, increases the firm's value and helps ensure business continuity if something happens to accelerate your exit. 

Decision Phase: Take Your Next Step

The work done in the discovery and preparation phases helps make the exit decision easier. With valuation, readiness assessments, documentation and strategic plans at the ready, you gain the flexibility to accelerate your exit if an attractive buy-out opportunity arises. You’re also able to adapt the plan to allow an intergenerational transfer, a management buy-out or a sale to employees as your situation changes. Or you may decide you’re not ready to exit and leverage the plans to drive continued growth and evolving exit strategies.

The professional services industry experts at CBIZ can guide you through the exit planning process, providing readiness assessment support, valuation services, financial planning, tax planning, succession planning and more. Connect with a member of our team and gain access to more resources here.

This article includes input from Scott Sutton, Managing Director of CBIZ Somerset. Scott is a trusted advisor for professional services firms, providing compliance and consulting services and guiding owners through the most important decision of their professional lives: how to successfully exit their business.

*https://exit-planning-institute.org/