A tax accountant’s role in exit planning

With a record 10,000 boomers retiring every day, more family-owned business owners are planning to step away from day-to-day responsibilities and pass on the reins. With an estimated $80 trillion in wealth transferred over the next two decades, how many of those owners and their families are fully prepared for that transition?

Not many. Data shows only 30% of family-owned businesses transfer to the second generation due to the absence of appropriate exit planning.

That’s where you come in—or should be coming in.

As the most trusted advisor to your business owner clients, you are ideally positioned to guide them on many aspects of the exit process. You know the financials inside and out. You know the company’s market. You know the owner’s dreams, fears, and goals. You can help businesses prepare a comprehensive exit strategy, addressing all potential challenges and contingencies. No one is in a better position than you to enlighten clients about the risks of inadequate planning, and work with them on a well-considered roadmap for business succession.

Here’s the best part: If you do the job well, you will likely be asked to stay on by the new owner, whether it’s for the existing management team or an outside third party.

Apathy toward exit planning

Many tax professionals don’t make exit planning a priority. They don’t prioritize their own exit plans, let alone those of their clients. Some believe that exit planning is too complicated, while others think it’s only for larger businesses. Recently, business mentor and exit planning specialist Christine Nicholson told me on my podcast that it’s time to change that perspective.

“There is too much at risk to do nothing,” said Nicholson, who believes it’s common for CPAs and finance professionals to view exit planning as something outside of their core competency. “As a trusted advisor, you don’t need to be the expert in everything; you just need to get the journey started and get the support each client needs.”

The other misconception among owners is that they have plenty of time to get their ducks in a row, but more than 50 percent of business owners experience an unplanned event. Nicholson calls those events “The four Ds” of the business owner’s apocalypse: death, disease, disability, or divorce. The four Ds can hit anyone at any time because they are not events anyone typically plans for. Having strong exit and succession planning means you are ready for any one of these events. Doing so de-risks the business, the owner, and their financial future security. It’s just good business.

The unprepared business owner: A success story

A business owner nearing retirement wanted to sell his business. With no plan in place, the business was initially unsellable and significantly undervalued. Nicholson said that once she conducted a thorough assessment of all aspects of the business, it was clear where the owner needed to put the most effort to get the fastest increase in value.

First, accountants started updating his financial records, making sure they were comprehensive, then she put together a succession plan and started transferring decision-making power at all levels with greater transparency and consistency. The owner also recognized that within his team he had someone who could, with some support, take over the leadership of the business. By clearly defining roles and responsibilities in the business, and by creating a new managing director role, Nicholson said it became easier to transfer control of the business to an existing key employee.

The hard part for the owner was letting go. While it was emotionally tough for the owner, she showed him how stepping aside—and not having the business so heavily dependent on him—would make the business more sellable. Ultimately, he agreed. In addition, by deferring the sale for at least a year, profit margins and valuation improved by more than $1 million in one year on top of 25% revenue growth.  Nicholson said the owner now has a business ready for sale any time he chooses and a potential buyer from within the existing management team that now runs the business without his input.

Scenario planning

As an accountant, looking at the different financial outcomes of selling the business within the next year, five years, or 10 years means the business owner can make informed decisions about timing. Exploring what happens if the business’ industry faces a downturn, new competitors, or other threats gives the business owner choices about the level of risk they are willing to take. Each scenario’s financial outcome adds a new dimension to the exit strategy, allowing for the formulation of a plan that is not only flexible, but also resilient.

Partnering for comprehensive planning

Your understanding of a company’s financial landscape is valuable, but a successful exit plan requires a wider range of knowledge and experience. That’s why I strongly recommend collaborating with outside professionals, each contributing unique expertise to create a comprehensive exit plan.

If you don’t already offer valuation services, consider building partnerships with business valuation experts—since an independent valuation is such an integral part of the exit plan. This will help align the business owner’s expectations with the potential buyers’ perceived value of the business.

• Legal professionals guide the business through the complexities of contract alterations, transfer of ownership, and other matters that arise during a business’ transition. An attorney’s knowledge can protect businesses from potential legal pitfalls and ensure a smoother transition.
• Wealth advisors and financial advisors offer helpful advice about managing personal finances post-exit. They can prepare a post-exit financial plan that ensures the business owner’s lifestyle remains unaffected, and allows for financial growth even after their primary source of income—their business—is sold or transferred.

Advise your clients now

Exiting a business is an emotional journey for your client, not just a financial and legal transaction. Make sure your client has their timing and post-exit goals well clarified before signing on the dotted line. The more expertise you bring to the table, the better the outcome will be.

Editor’s note: This article is also available in Spanish.