The Advisor’s Role in Exit Strategy

A business owner needs an exit strategy to reduce or liquidate their stake in the company. A highly profitable business garners a higher sales price. However, a business that’s not doing so well needs an exit strategy to help the owners cash out profitably or minimize business losses. Influencing factors include industry, location, operational history, past balance sheets, revenue statements, etc.

The exit planning process is complex, and strategies vary for each business owner. Company owners preoccupied with their numerous business commitments find themselves in the precarious position of balancing the business with the exit planning responsibilities. The entrepreneurs need relief from and help with the overwhelming responsibility. Exit planning advisors and their advisory teams provide that relief by managing all business aspects with care and precision.

The exit planning advisor is primarily responsible for leading and coordinating the entire process from initial data collection to the final implementation of the strategic plan. The advisor’s key responsibility is to ensure the business owner’s financial security following their exit.

Advisory Team Roles

A single advisor can’t create and implement an exit plan. There is a lot to handle and too much to do; moreover, different business divisions (e.g., finance, HR, legal) require expert supervision and guidance. In such cases, exit planning advisors use an advisory team approach to manage each business aspect and ensure that their clients can exit their businesses on their terms.

The team comprises various experts, including but not limited to CPAs, attorneys, insurance professionals, and financial advisors. Exit planning advisors assemble their advisory teams to address specific aspects of the owner’s exit. They also delegate responsibilities to the appropriate team members to ensure the owner’s wants and needs are fulfilled.

The exit planning advisor and the advisory team have three primary responsibilities:

  • Educate the business owner as to their role in the exit process.
  • Facilitate exit planning by acting in tandem with other advisors (advisory team) and coordinating their activities with the owner’s internal business advisors.
  • Provide end-to-end services to owners for a successful transition from the business.

Different advisors are involved in the exit planning strategy and have different roles:

Certified Public Accountant (CPA)

A CPA advising business clients must have regular conversations with the owners, not only when the owner wishes to retire. This is critical as owners should have some basic idea of how they want to spend their lives after selling the business. The CPA plays a vital role in devising a plan that supports the type of lifestyle the owner expects after retirement.

The CPA is also responsible for financial analysis of all business units, valuation, estate tax analysis, tax planning, and counseling to promote the business value and exit the business. CPAs also help in wealth preservation, business transition, and pricing the business and its assets. Other responsibilities include:

  • Setting the business exit objectives: The CPA advises the owner of the importance of developing exit objectives and helping to set those objectives. To do this, they also need a thorough understanding of the owner’s financial goals.
  • Help in determining the business value: A CPA performs a periodic valuation of the business and assesses its cash flow projections.
  • Protect, preserve, and promote business value: One of the most important ways to preserve the owner’s wealth is by minimizing the tax consequences upon exit. CPA create financial audit systems for all business units; this is critical if the owner wishes to sell the business. They also make a financial model to project growth and reassess capital or financing needs and any other consulting that the owner requires.
  • Help monetize business value through the sale: At this stage, they are responsible for pre-sale tax and financial planning (ideally, this should begin years before the expected exit). They also conduct an extensive review of financial and tax implications upon sale, prepare the past three years’ audit with a complete review of all financial documents, and represent the owner’s financial needs and other warranties.
  • Or help transfer the business internally: The CPA’s responsibilities include conducting cash flow modeling, analyzing the tax implications of the internal sale, periodically planning and conducting assessment meetings with all stakeholders, and offering to counsel on cash flow and tax transfer plans.
  • Develop business contingency and wealth preservation planning: Once the type of exit is selected, the next step is to choose the most appropriate valuation method and perform the business valuation for buy-sell and other agreements. At this time, the CPA must inspect the business’ future cash needs (in case of the owner’s sudden demise). For wealth preservation, the CPA’s duties include reviewing the estate plan and tax consequences, planning for income tax reduction, and projecting income tax if an asset is transferred to the family.

Related: Is your CPA the right person for your company’s valuation? 

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Financial Advisor

A financial advisor plays a crucial role in quantifying the owner’s exit objectives and goals. To do this, they perform a financial needs analysis to determine retirement income needs and wants. They also review and offer advice regarding personal investment strategies that are aligned with the exit plan. Thus, they play a vital role in preserving and promoting value and determining the value of the business by analyzing the current amount of the owner’s investment assets.

To do this, they do the following:

  • Help set exit objectives: The advisor conducts a future financial needs analysis and helps the owner quantify their requirements.
  • Determine business value: They project the income needed after business exit and prepare a financial plan. They also offer counseling for risk tolerance before and after the exit.
  • Preserve, protect, and promote value: They design employee compensation, retirement, and other benefit plans.
  • Ensure the owner’s exit objectives and future financial needs are met. They ensure the owner is financially independent during the sale to a third party or if the business is transferred internally.
  • Participate in contingency and estate planning: In case of the business owner’s untimely death, they ensure that the sale proceeds are available to the spouse. They also analyze the estate plan for regularity with exit objectives and ensure that the surviving family is financially independent.

Attorney

The attorney’s primary role is to offer counsel and insight into all legal aspects of the business. They are also responsible for performing due diligence and drafting and designing legal documents as necessary for the following:

  • Transfer of business ownership within the family (business succession planning and process)
  • A business merger or acquisition
  • Transfer of ownership to management or acquiring a co-owner
  • Estate planning to link the owner’s lifetime goals while fulfilling the estate planning objectives
  • Managing and executing the employee stock ownership plan
  • Incentive planning for all key employees
  • Reducing the risks to which the business is exposed
  • Deferred compensation planning.

The attorney must always be kept in the loop with all other advisors, especially the CPA, the financial advisor, and the CEPA.

Certified Exit Planning Advisor (CEPA)

The CEPA leads and coordinates the entire exit planning process from initial data collection to final implementation. Their primary goal and responsibility are to facilitate the owner’s exit from their business with complete financial security and help them achieve their exit goals.

With the help of value acceleration methods, the CEPA focuses on three primary business aspects:

  • How to maximize the business aspects
  • The owner’s financial planning
  • The owner’s retirement planning.

Once they help the owner determine their business exit goals, they design strategies to meet those goals. They implement best practices for the business’s day-to-day operations and educate the owner on wealth preservation tactics. They also help the owner prepare for disability, divorce, or death. With the CEPA’s support, the owner can pursue their happy exit goals.

Financial advisors, insurance, banking, or legal experts often undertake specialized training to become a Certified Exit Planning Advisor and provide other advisory services for the business owner.

Author Summary

Makalyn Feaster

Makalyn Feaster

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