If you have a business and you plan to leave it at some point in your lifetime, you need to plan your exit strategy early on. Even if you plan to retire or leave it decades into the future, what you do now will set you and your business up for long-term success and avoid large challenges for a sale or transition later on. Having a business exit strategy helps protect you, your family members, your company, and your investors from harm.
Planning Your Business Exit Strategy
Your business exit strategy options will depend on your company and your personal needs and goals. There are, however, several critical elements in every exit strategy. Let’s go through the basic questions you will need to answer when you begin this process.
What
What is a business exit strategy? It’s a written plan for the transition of business ownership to family members, another owner, or investors. It helps align an owner’s business, financial, and personal goals and also acts as a guide for decision making. It will be continuously revised over time as the business scales, so it is never a one-and-done document.
Why
Every business owner needs to carefully consider his own objectives and goals for an exit, and these will vary greatly from person to person. For some, realizing the highest price at sale will be the most important consideration. Owners of established family businesses may prioritize leaving a legacy to their children and community. Determining what is important will help simplify the decision making process at every stage.
Who
The right exit strategy for the owner will depend on who the next owner will be. For instance, if the owner plans to transfer the business to his children, that means that a large part of the process will involve preparing them properly for their future leadership roles. This will involve training or education that can take years to complete. Selling to investors or to an individual buyer would mean developing the management team in a different, but equally important way.
When
Setting the timeline of the exit is vital for planning. The earlier the owner begins to plan, the higher his chances of success because he can use that time to install value drivers and prepare himself personally for the transition.
Sometimes personal circumstances or market conditions require that the timeline for the exit shifts. The economy may be good or very bad, rising interest rates can make leaving sooner more appealing, or the industry may have more potential buyers at a specific moment in time. Planning and addressing weaknesses in the business early gives owners more leeway for making timing changes if necessary.
How
An exit plan begins with a proper understanding of the business’s value. This requires a business valuation, or a formal report compiled by a valuation professional that determines the economic value of the business, including its tangible and intangible assets. This valuation will give the owner an understanding of its current market value while also uncovering any weaknesses in the business that need to be addressed.
The owner will then have specific work to do, whether that’s developing management, acquiring skilled labor, diversifying the customer base, eliminating owner dependency, or accessing necessary capital for growth.
Benefits of Exit Planning
An exit plan provides owners with a better idea of what the impact the transition will have on their own personal wealth upon exit and how to plan to mitigate taxation upon a sale. It can also help them to establish post-ownership goals so that retirement will be enjoyable and not a shock to the system either personally or financially.
Making an exit plan eliminates guesswork and minimizes emotional decision making. It’s also extremely useful for keeping track of the company’s finances and growth. Prospective buyers will want to know the company’s revenue history and performance metrics. An owner focused on an eventual sale will be very conscious of both and continuously tracking and recording that information. This attention to detail will be attractive to any potential owners or investors.
A business exit strategy is a crucial part of any overall business plan. If you need help planning your exit strategy or achieving any of your other business objectives, Prometis Partners has the experience and expertise to help you create a plan that will result in growth now and a successful sale when you are ready for that new phase of your life. Schedule a call today to start that discussion.
