Dealing With the Unforeseen in Exit Planning

Fri, 07/12/2019 - 09:00


Exit Plans are rarely set in stone. There are simply too many factors that can change on a dime. Recall that over the last few articles, we’ve looked at how a successful business owner named Linda wanted to transfer her business to her two sons and exit in five years with financial security. As she and her Exit Planning Advisor discovered, Linda’s original plan wouldn’t allow her to exit with financial independence. As they proceeded with planning, they also learned that only one son, Jimmy, was interested in ownership. Her other son, Gene, was not interested in ownership, and his continued employment was adversely affecting company performance.

Emmy and her Advisor Team needed to help Linda recalibrate her Exit Goals. First, Linda decided that she wanted her other son, Jimmy, to eventually take full ownership. However, she also had to address the fact that her sister Gail was interested in ownership. Linda didn’t want to give Gail actual ownership. Emmy and her Advisor Team decided that the best way for Linda to achieve financial independence and still transfer the business to her son required Gail to remain with the company through Linda’s exit. It also required Jimmy to step up to the ownership plate.

So, they created an incentive plan for Gail designed to reward her with a current and deferred bonus (subject to vesting) if cash flow met annual benchmarks. Attaining those benchmarks meant Linda could exit on her birthday in five years, just like she wanted, while rewarding Gail for her hard work and perseverance in the company.

At the same time, Emmy and the company’s CPA designed a plan to bonus ownership to Jimmy while also allowing him to buy 5% of the stock each year at a minority discount if the company achieved the same cash flow benchmarks set for Gail’s incentive plan. This addressed Linda’s desire to keep the business in the family. It also set boundaries for Jimmy—which was something he needed—to eventually own the business.        

With ownership transfers and incentive plans properly designed and aligned with Linda’s goals, the company met its cash flow benchmarks in the first four years. In the fifth year, Jimmy cashed Linda out using a bank loan to acquire her remaining ownership interest. On her 70th birthday, Linda retired, just like she had planned.

Reaping the Benefits of Proper Exit Planning Preparation

Linda’s success may have seemed easy, but she faced several obstacles that could have derailed her plans. First, Linda was dead-set on transferring the business to both sons.

Second, Gene could have inadvertently destroyed Linda’s plans to exit with financial security. Gene was both uninterested and unqualified for ownership, but Linda didn’t know any of that until her Exit Planning Advisor and business consultant met with him. By finding and addressing this issue early, Linda gave herself and her advisors time to plan around it and still treat her now-non-business-active son fairly.

Finally, addressing Gail’s desire for ownership by creating an incentive plan for her kept her onboard and motivated to achieve the growth Linda needed to exit on her terms.

Through proper planning, Linda avoided late-stage surprises that constantly pop up during Exit Planning. She treated everyone equitably. And most importantly to her, Linda kept the business in the family. She positioned herself to succeed by retaining Exit Planning savvy advisors.


  • Exit Plans typically need to be adjusted because of changed circumstances. Advisors must make owners aware of this likelihood early in the planning process.
  • Owners who start the Exit Planning Process early tend to have more successful exits because their advisors can properly plan for the unexpected.
  • With enough time, owners and advisors can adjust Exit Plans to achieve most—if not all—of an owner’s Exit Goals.