A Graceful Exit

Do your clients have sound strategies to reward and replace current owners?

  • FORMULATING A successful exit strategy requires figuring out what your client really wants and devising a plan to get there. CPAs in public practice and in industry are uniquely positioned as trusted advisers to develop a sound exit strategy.

  • FINDING OUT WHAT YOUR CLIENT WANTS is the first step in creating a successful exit strategy. Ask precise, open-ended questions and challenge the answers. Express the targeted results in specifics—numerically, when possible. For family-owned companies, a family retreat is a good forum in which to allow each person to voice an opinion.

  • THERE MUST BE OWNER CONSENSUS ON HIS OR HER role in the company after the transaction. Owners don’t always want to go away. Many hope to cash out and still run the company. The scope of postclosing owner involvement is an important part of the exit strategy.

  • THE BEST EXIT VEHICLE meets requirements for value of enterprise, owner involvement and timing.

  • EXECUTING AN EXIT STRATEGY does not happen overnight. The process is a structured and disciplined program that takes between one and five years to accomplish.

CHRIS MALBURG, CPA, is the director of value enhancement and exit strategies at Kibel Green Issa Inc., consultants to management, in Santa Monica, California. His e-mail address is crmalburg@kginc.com.

o financial transaction carries more monetary or emotional significance for a top manager than planning a smooth exit from the company he or she owns. For some owners, selling a company means a payday beyond anything they ever dreamed of. For others, it's an estate planning issue requiring reallocation of net worth and liquefying a previously dormant asset. Many owners avoid planning their exits altogether because they fear the implications—retirement and growing old.

As a CPA whose tax, estate planning or consulting clients already consider you a trusted adviser, you are in the best position to help them prepare for a graceful exit. CPAs who work in business and industry—especially in family businesses—usually know enough about operations and are close enough to the owners to offer valuable advice as well. In short, CPAs practicing in public accounting are well positioned to design and implement effective exit strategies for the founders and other owners of small and midsize family-owned companies.

Every successful exit strategy must have three common elements:
  • Agreement on the target result among all partners and family members.
  • Consensus on owner involvement in the business after exiting.
  • Precise timing that maximizes the enterprise's value.


You can't assume you know all of a business owner's objectives and goals just because you've worked with him or her for a number of years. You must be able to discuss retirement and other personal goals during the exit planning sessions—you'll be surprised at what you don't know about an owner.

One of the first steps you should take is to establish an open forum that involves all the owners of the business—you are helping the owners communicate their goals to all the shareholders. When working with a family-owned enterprise, though, ensure that you include everyone with an equity vote—family stakeholders who don't help form an exit strategy frequently reject measures on which they aren't consulted. A family retreat is a good forum in which to allow each person to voice an opinion—and is a necessity for companies owned by large, geographically dispersed families.

As the facilitator of such a retreat, you should ask open-ended questions that can't be answered by a simple yes or no. Your goal is to get the owners thinking in terms of what they want to do with the business, and with their lives, after relinquishing their management positions—it's best when the owners can reach a consensus. For example, it makes little sense bringing in professional management with the objective of freeing the owner from daily operating responsibility and then allowing him or her to retain authority—official or de facto—to still call the shots. (See "What Are Your Goals?" for examples of questions that can illuminate these issues.)

Listen carefully to their replies to your questions, factoring in what you've learned so far, and challenge their answers to ensure they are well-thought-out. For example, "What would you do if you didn't have to come to work every day?" Typical responses: "I'd play lots of golf" or "I'd travel." To dig deeper, make a statement and follow it up with a question: "You're the president. You can play golf now whenever you want. What will be different after you sell the business? How much leisure time can you stand?" Another example: "You've been living out of a suitcase for 10 years as it is. Where do you want to go that you haven't visited already?"

What Are Your Goals?

Questions to ask the owner to determine what he or she wants from leaving the business:

  • What would you do if you didn't have to come to work every day?
  • How does your family feel about succeeding you in running the company?
  • How do you feel about the risk you're taking by keeping a significant portion of your net worth tied up in just one asset?
  • How is your health? Has it had any adverse effect on the business?
  • What could the company do with a significant injection of outside cash?
  • Who are the significant employees and how do you intend to retain them? Who among them is capable of succeeding you and the other senior executives?
  • What conflicts do you have with your partners or family that make continuing with the business difficult (or just not fun)?
  • How will technology and competition affect the business in the future? How will you tackle it? Do you trust the investment in technology is worth the time and money?
  • What kind of liquidity do you need to meet estate planning and your anticipated living needs after you leave the company?
  • What do you and your partners or families want to do with the business?


Determining what business owners will want when they retire can be like creating an answer before asking the question. The answer will show what the owners want from—and what they will be willing to do for—the company after they exit. That can be the most difficult part for the CPA. The questions must provoke honest, thoughtful discussion among the owners. The process is like reverse engineering: We know what we want; now we must figure out the steps to get us there.

Encourage owners to allot plenty of time and thought to the discussion so the owners can list the objectives of their exit from the company. However, always bring the discussion back to these critical issues:

  • Total dollar value expected from the transaction.
  • The extent of owner involvement after the exit.
  • When the exit process will be completed.

Case Study
Financial Independence in Three Years

T wo brothers owned a mail order and Internet e-commerce company selling computer chips, boards, drives and other internal devices. Their CPA pointed out a change in the business climate. The industry was converging with bigger players entering the market by swallowing up smaller companies and offering heavily discounted products. When sales hit $20 million with net income of $1.5 million, the CPA strongly recommended the brothers develop an exit strategy.

Since the brothers got along well, creating an environment for honest communication was not difficult. Together with their CPA, the brothers agreed on the following strategy:

  • Immediately limit the risk of having so much of their net worth tied up in a single asset—the company.
  • Eliminate all financial and executive involvement of the brothers within three years.

Their CPA devised an exit vehicle comprising two different phases. The first was a leveraged recapitalization. This was a loan to the company from a bank, which replaced existing financing with a lower interest rate, boosted working capital and liquefied the company. A provision negotiated in the loan agreement allowed for an immediate dividend payment of $6 million to the brothers from the loan proceeds.

The second phase required sale to a strategic buyer within three years. However, within two months the company closed on a strategic acquisition in a related industry that was expected to boost its value significantly during the three-year period. Additionally, within six months the brothers sold 25% of their stock to a strategic buyer based on the current valuation of the business. The deal specified valuation multiples and performance benchmarks used to compute future stock price. At the end of three years, assuming the company performs, the strategic buyer will own 100% of the stock, the buyer's staff will assume executive control and the brothers will be financially independent of the company.

Answers must be precise and detailed, not ambiguous. When possible, name names, specify dates and quantify values. For example, identify the exact dollar amount needed from the exit transaction. Ask the owners to justify how they arrived at that amount—with further thought, their target amount may change. Owners also should list in detail the responsibilities they will continue to have after their exit. Identify the exit date and create a timeline—working backward—that includes all the owners must do to meet their goals. As the professional adviser, you will be judged on how closely the final result matches what the owners said they wanted. This list covers some of the issues you'll need to help them resolve:

  • Who is responsible for implementing the exit strategy? This should be a company manager with enough power and influence to enforce the timetable and hold the owners responsible if they begin dragging their feet.
  • What mechanism tracks progress of the exit plan and makes corrections when necessary?
  • On what date will the exit process end?
  • Who exactly will have executive positions in the company and what will they be?
  • How will current owners be phased out and family members groomed for leadership roles?
  • What training will successors need, when will they get it, who will pay for it and who will determine their competency to take over?
  • How much money must the company generate from this exit strategy to support the owners?
  • When will this money be needed?
  • What form must these proceeds take, for example cash, notes, stock?

As you resolve these issues, you will determine the best exit vehicle to accomplish the owners' objectives. For example, say the owners have a one- to three-year time horizon but want to cash out at that time with no further management involvement. Doing an IPO fits the timing. However, liquidity is a problem because owners are restricted from selling newly issued stock (see "Liquefying Rule 144 Stock"). Merging with another company may be the better choice—it takes owners out faster and they can negotiate a combination of cash and stock. Another vehicle involves finding a strategic buyer such as a consolidating company. Consider all your options openly with the owners during your discussion sessions (see "Elements of Exit Vehicles").

Elements of Exit Vehicles
Exit Vehicle Time to
Form of Payment Owner Involvement
IPO 23 years Registered stock 100% and continued 10
Leveraged recap: Funds loaned and
a portion paid toowners as a dividend
<1 year Some cash paid to
owner; cash flow
leverages the
company's value
100% and continued 4
Sale to strategic buyer: one that needs
this company specifically
12 years Some cash, notes
and stock (negotiated)
None or limited 8
Sale to financial buyer: one that is
interested only in the company's profits
12 years Some cash, notes
and stock (negotiated)
Employment contract likely 46
Merger 1 year Cash and stock Employment contract possible 7
Professional management hired
to replace owners
<1 year Dividends None 0
Family dynasty perpetuated in a
succession plan
35 years
to implement
Wealth transferred
to family members
Phased out over succession plan 0
Company sold to the employees
through an ESOP
12 years Cash and installment
100% 9
*This index runs from 1 to 10, with 10 describing the exit vehicle with the greatest potential value. The values reflect the author's subjective opinion—others are likely to have different views.


Determining the company's ability to meet its financial objectives should be next on your agenda. Exit strategy architects help owners determine their economic objectives and create plans to realize them. My business has found most owners have only a slightly inflated perception of their companies' value; a few are out of the galaxy entirely; a minority actually underestimate their companies' worth.

Regardless, the next step is to identify whether and how the company can afford to have an owner cash out. Along with deciding how to value the company in the open market, you should assess staffing capabilities, product lines, working capital resources and the other ingredients that allow a successful company to continue growing. Each of those variables affects the disposition price. If you cannot determine a value yourself, engage a valuation professional to do it for you.

Various strategies are available to close shortfalls between a company's fair market value and the exit strategy's target. What's usually required is some type of improvement that raises the company value to meet the expectations of the departing owner. Raise the following strategies with your client to increase value:

  • Create a detailed business plan that identifies how the company's value can be raised to meet the target.
  • Reorganize management into a team that can bring the company to the targeted objectives. If the company needs new blood—especially at the top—find and hire the talent.
  • Restructure the company by spinning off unprofitable divisions or product lines. Revenue from those sales are likely to provide the working capital to expand the profitable operations.
  • Identify and schedule strategic capital investments that produce a return robust enough to increase the company's overall value.
  • Make strategic acquisitions designed to boost profits closer to the level needed.
  • Reposition the company in the marketplace to take advantage of its new products or services.
Liquefying Rule 144 Stock

SEC rule 144, which aims to maintain an orderly market in new stocks, restricts an owner's ability to sell newly issued stock within a two-year period. The good news is that restricted stock can be liquefied. For example, some companies have specialists dealing exclusively with restricted stock, using it as collateral for loans. Additionally, owners can sell puts against the stock; puts allow the seller to raise cash from a previously illiquid asset. If an IPO with restricted stock is in your client's exit strategy, be sure to factor in the discount involved with such liquefaction measures when computing the available cash after closing the transaction.


Depending on the situation and client needs, there are several exit structures to choose from such as mergers, consolidations and leveraged recapitalizations. The exhibit on page 45 illustrates the attributes of such structures.

If you decide to team up with an investment banker who specializes in exit strategies, pick one with in-house expertise in organizing initial public offerings (IPOs), mergers and acquisitions, corporate finance and consulting. Some specialize in specific kinds of exit structures. Finally, make sure the investment banker has executed enough transactions to form a solid base of experience—at least several billion dollars worth of deals closed.

Some CPAs hire two different investment bankers: The first provides independent advice while the second transacts the deal. This approach enhances the chance of an independent, well-considered opinion. However, be aware that even so-called independent investment bankers may recommend colleagues from whom they receive client referral fees—arrangements that could cloud their judgment and result in less than independent advice.


By this point, you should have achieved the following results:

  • The owners agree on their exit vehicle.
  • They know their future roles in the enterprise.
  • They know the personal financial implications of the transaction.
  • You have prepared a plan to enhance the company value to the point where it's possible to meet the owners' objectives and goals.
  • The owners have chosen an exit strategy.

The exact timing of the exit is the next critical ingredient. Before you set a date, you must take into consideration a number of factors such as the owners' personal goals, capital market conditions and the availability of essential personnel to be present at planning meetings. Timing can be used to control risk and can affect the choice of exit vehicles. For example, if the owner's health is failing and no successor is trained or willing to step in, then a quick sale may be the best strategy.

Regardless of the strategy selected, identify each milestone to be met, when it is due and who is responsible. Make sure all implementation team members understand the timetable. Review each milestone on a monthly basis.

Planning for a Successor

Getting departing owners comfortable with successors can advance the exit strategy process. Here are some ways you can help clients achieve successorship planning:

  • Encourage your clients to understand why they should leave while they are still on top.
  • Discourage clients from creating competition for succession to the top job. Instead, suggest selecting a qualified successor who really wants the job and letting everyone know early who it will be.
  • Don't let the owner(s) replace the retiring CEO with a committee to run the business—this approach never works.
  • Never recommend that the CEO carry on for the good of the family or to maintain tradition. These are never good business reasons.
  • Point out the steps necessary to protect the business and estate from squabbles involving divorce, unfriendly partners, family members or heirs.


CPAs are in a great position to devise sound exit strategies for their clients because they understand their clients' goals and what companies require to increase their value. When advising your clients, remind them they must prepare now, even though they may have no current plans to leave their companies—good exit strategies take between one and five years to create. The rewards are worth the wait. Instead of selling a business as is, your client may be able to fetch double or triple its current fair market value. Preparing early will leave behind a satisfied former owner and a viable business.


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