EXIT Plan

Do your clients who operate their own businesses have the appropriate insurance and coverage in place to ensure a successful exit from their companies?

Like many business owners, Reta was thinking about selling her company in the near future – but hadn’t yet devised a plan for doing so. She will be relying on the proceeds from the sale of her distribution company to support a comfortable retirement. Yet Reta was unaware that nearly two-thirds of Canada’s independent business owners also plan to retire, sell or pass along their enterprises within less than a decade.

This growing supply of companies that will be coming to market makes it vital for owners to have an exit plan in place to optimize the value and salability of their businesses. However, a BDO/COMPAS poll has found that fewer than half of business owners actually have an exit plan in place.

In order to allow sufficient time to develop a strategy and to build the value of a business, exit planning must begin several years prior to the intended exit date. This presents an opportunity for insurance brokers and agents to review their clients’ current and future insurance requirements in light of the role that insurance can play in enhancing the value and salability of their enterprises.

A potential purchaser of Reta’s business, for example, will expect assurances that certain risks facing the enterprise have been addressed with appropriate insurance. Adequate coverage will not only protect Reta, her business and her fam- ily in the event of an unforeseen or unexpected incident (theft, fire, flood, death, etc.), but it will also make her business more attractive and salable to potential purchasers by reducing the company’s overall risk profile and increasing its value. Inadequate insurance coverage, however, may discourage prospective buyers and prevent her from controlling the timing of her exit.

EXIT STRATEGY

Fortunately, Reta’s broker contacted her when he did. As it turns out, Reta did not have an exit plan. Also, she hadn’t reviewed her company’s insurance coverage in more than four years, despite the fact her business had expanded significantly during that time. The broker’s timing proved to be ideal, not only to review Reta’s current insurance requirements but also to discuss the need for an exit plan in light of her intention to sell her business in the near future.

An exit plan addresses the business, personal, financial, legal and tax issues involved in transitioning a privately-owned business to new owners. Devising a comprehensive plan therefore generally involves a team of people. Among those who typically participate are the shareholders and their families, as well as key members of management. The company’s insurance agent or broker, accountant, lawyer and financial advisor with experience in developing exit plans should also be involved.

Fortunately, Reta’s broker often worked with an advisor who had extensive experience with exit planning. When he suggested they all meet, Reta’s own plan was soon underway. Here are the steps they took:

• They assessed Reta’s personal, business, and family goals to provide direction and a frame of reference for the plan. Reta decided she wanted to maximize the net proceeds on the sale of her business.

• They conducted a financial needs assessment to identify the funds she must realize from the sale of the business in order to achieve her goals. Reta estimated the after-tax annual income she would require in retirement to sustain her lifestyle.

• A professional business valuator conducted an independent business valuation to determine the insurance coverage required. The valuator then mapped out a plan for increasing the value of the business in preparation for a sale. Reta learned she needed additional insurance coverage; she also received suggestions from the valuator regarding ways to increase the value of her business over the next three years.

• An exit alternatives analysis identified the exit option that would best achieve Reta’s goals. Reta decided she wanted to pursue a sale of her business to a strategic purchaser; she indicated she would be willing to stay on with the company for a period of one year to ensure a smooth transition and maximize value. An analysis done for other business owners might suggest a sale to family members, shareholders or management team; a third-party sale; a refinancing; or going public.

• A net proceeds analysis for each relevant exit alternative to ensure the expected net proceeds would accomplish Reta’s goals.

• An action plan for Reta, personally, and for her business. Among the key action items were assessing insurance needs (i. e. types and coverage), updating existing insurance policies and preparing a contingency plan.

• In order to protect the assets and operations of Reta’s business, her broker recommended she obtain property and casualty insurance, including business interruption insurance. He also recommended increasing her life insurance in light of her company’s growth in the past four years. This would protect her family in the event of her untimely death by providing them with funds to replace her income and help to pay the estate taxes.

By investing the time and effort to prepare for the sale of her business, Reta was ultimately able to sell her company to a strategic purchaser for a significant sum in excess of what similar, unprepared businesses would receive if they came to market around the same time. Proper insurance and coverage was instrumental in allowing her to leave her company at a time of her choosing.

Given the surge of baby boomer business owners who will be exiting their companies in the coming decade, this is an opportune time to initiate a discussion with your clients about proper exit planning. Integrating the appropriate insurance into their planning can help them maximize the company’s value when they decide to sell or transfer the business to new owners. Now, that’s a good conversation starter.