When playing chess, every player knows the importance of strategizing on a brilliant move to checkmate the opponent. But in the game of entrepreneurship, many business owners ignore one crucial move to end the game with a win – business exit planning.
An exit strategy, often overlooked in the excitement of starting and running a business, is as vital as the business plan itself. According to the Exit Planning Institute, 72% of business owners have no exit plan in place. What’s even more shocking is that, while 38% of businesses do have some form of exit strategy, only 17% end up exiting on their own terms (presumably, that means for a desirable profit and on a desired timeline).
This article will guide you on how to plan your exit effectively, ensuring that when the time comes to make your move, you’re fully prepared and in control to do what’s best for you and your business.
What Is a Business Exit Strategy?
A business exit strategy involves a plan in which a founder or owner(s) of a business prepares to sell their stake in a company, or completely exit the operations of the business. It’s essentially a plan that outlines how the business owner plans to transfer ownership of the business, either to another company, to investors, or to members of the family.
An exit plan provides a clear roadmap to ensure the transition is smooth and the business can continue to operate effectively even after the owner’s departure.
Think of it like planning your route on a road trip. You want to know your destination, the stops you’ll make along the way, and what you’ll do when you arrive. The same applies to an exit strategy – it helps you map out your journey, including when you want to exit, who could potentially take over, and how you’ll manage your finances after leaving the business.
This plan is not only beneficial for the company’s continuity, but it also protects the owner’s financial future and the investments of any stakeholders involved.
Benefits of an Exit Strategy
Having a well-thought-out exit plan provides clarity and direction. Like a roadmap, the best exit strategy helps you to start with the end in mind, and outlines the steps you need to transition out of your business smoothly. Developing an exit strategy in advance for your business keeps you focused on your long-term goals and helps you make decisions that align with these objectives.
Moreover, an exit strategy gives confidence to investors. When investors see that you have a plan for potential outcomes, including exit, they understand that you’ve considered all possible scenarios. This foresight may increase their confidence in your leadership and make them more willing to be part of the business or to offer you favorable funding options.
Furthermore, it can maximize the value of your business. By planning your exit in advance, you can implement strategies to increase your business value and ensure you get the best possible price when you decide to sell your business.
Finally, this strategy ensures the longevity of your business. A well-crafted plan ensures that the business can continue to thrive even after your departure, protecting your legacy and the investments of your stakeholders.
So, while the prospect of exiting your business may seem daunting, remember that an exit strategy is not just about leaving—it’s about securing the future of your business, the returns on your investment, and your own financial future.
3 Best Business Exit Strategies
1. Merger & Acquisition
Mergers and Acquisition (M&A) is one of the most popular exit strategies for many entrepreneurs. When you merge with another company, you join forces with another business, typically of the same size, to become one entity. This process allows for shared resources, broader market reach, and often results in increased business value. While it is possible for both owners to stay on board as a newly formed partnership, it’s also possible for one owner to exit either immediately, or after a transition period is complete.
An acquisition exit, on the other hand, typically involves a larger company purchasing a smaller one. This strategy is often chosen when the larger company is interested in the smaller company’s market share, unique technology or competency, customer base, or talent base. The benefits of an M&A strategy include immediate access to cash, the potential for a large payout, and the oftentimes the option of retaining a role within company – or not.
If a merger or acquisition is your ideal outcome, you’ll need to assess in advance who an ideal acquirer could be so you can invest in positioning your company accordingly. For example, while your customer base might be of significant value to a direct competitor, a potential buyer in a complimentary industry might be more interested in your company’s technical expertise to help them expand into a new space. Making these assessments early on will absolutely affect your strategic decisions as you build the business and prepare it for sale.
It’s worth noting that M&A deals can be complex and may require lengthy negotiations. It’s recommended to engage the services of a professional coach, M&A advisor, attorney and CPA during the process.
2. Initial Public Offerings (IPO)
Some consider an Initial Public Offering (IPO) to be the most prestigious exist strategy. When using this strategy, the owner takes the business to the public by selling its stocks to the general public for the first time. The primary advantage of an IPO is that it can attract venture capitalists to invest early on, and potentially raise a significant amount of capital upon going public.
The influx of public investment can enable further growth, expansion, or debt repayment. Additionally, going public can significantly increase a company’s exposure, prestige, and perceived value, attracting new business and talented employees. At this point, an owner who wishes to exit can attract a highly qualified professional CEO to take their place in leading the company into the next phase.
However, there are considerable complexities and regulations involved in this process, including rigorous financial audits and disclosures to the Securities and Exchange Commission (SEC). Furthermore, once a company goes public, ownership can become less centralized, and decision-making may shift towards the shareholders. On this path, it’s crucial to have a comprehensive understanding of the process and its implications.
Professional legal and financial advisors can offer valuable guidance to navigate through an IPO. Despite the challenges, if executed correctly, an IPO can be a highly rewarding exit strategy, providing substantial financial returns and a lasting legacy for your business.
3 . Selling of Business to Managers / Employees
When you sell the business to your managers or employees, it is called Management Buyout (MBO) or Employee buyout (EBO), or it could be an Employee Stock Ownership Plan (ESOP), which allows employees to invest in the company as a retirement plan, eventually giving them ownership. This approach allows for a smooth transition as the buyers are already familiar with the business operations, culture, and industry landscape. It can also be a great way to reward and empower those who have contributed significantly to the business’s success.
An MBO/EBO can provide continuity for customers and employees, maintain business confidentiality, and potentially offer tax advantages. Additionally, it may be emotionally satisfying for the business owner to see the company pass to individuals who are passionate and invested in its future.
That said, financing such a buyout can be challenging as employees may lack the necessary funds. Solutions for this can include seller financing, where the owner receives payments over time, or external financing options like bank loans or private equity. It’s also important to note that an MBO/EBO can create conflicts of interest and tension if not handled carefully.
Other Options to Consider
Deciding to liquidate a company is where an entrepreneur decides to cease operations and sell off all company assets. This approach is often considered when a business is no longer viable, or the owner wishes to depart without transferring management to another party. Liquidating your business can be a relatively quick process, converting assets into cash that can be used to pay off creditors, investors, or retained by the owner.
However, this strategy has pros and cons.
The cons are that it tends to yield lower returns compared to other exit strategies. It’s crucial to keep in mind that asset value often depreciates in liquidation sales, and there’s a low probability of fully recouping your initial investment. Furthermore, liquidation means your business is closed, leaving no legacy or ongoing entity.
Nonetheless, in certain instances, it could be the most suitable choice. For example, in the case of a single-owner business with no successors or interested buyers, when the business is burdened with insurmountable debt, or when the owner is unwilling or unable to make investments to bring an antiquated product, service or technology up to where it needs to be to compete in the current market. Given the potential implications, it’s advisable to engage with a business advisor, attorney and accountant when considering this exit strategy.
Bankruptcy is often seen as a last resort among the business exit options. It’s often used by businesses facing overwhelming financial troubles. This process involves legally declaring that the business is unable to pay its debts. Bankruptcy can provide a lifeline by protecting the business from creditors, providing some breathing space to reorganize, or allowing for an orderly shutdown.
There are different types of bankruptcy options, but the most common for businesses are Chapter 7 and Chapter 11. Chapter 7 bankruptcy, also known as liquidation bankruptcy, involves selling off all non-exempt assets to repay debts. It essentially marks the end of the business. Chapter 11 bankruptcy, on the other hand, is a reorganization that allows the business to continue operations while restructuring its debts under the court’s supervision.
While bankruptcy provides relief from relentless creditors and potential lawsuits, it comes with significant downsides. This includes severe damage to the business’s credit rating, loss of control over finances, and potential personal financial impact, especially if the owner has provided personal guarantees for business debts. Not to be overlooked is the impact on employees and customers, and the risk to business or personal reputation.
7 Steps to Developing your Exit Plan
1. Know the Business
Knowing your business doesn’t just mean you know how to run it. It means you are capable of approaching it objectively, setting aside emotions and biases to evaluate it like an asset, not to protect it like your baby.
In this phase, consider conducting a business valuation with the help of a professional. This valuation will provide a realistic perspective on what the business is worth and form the basis for your exit negotiations. It’s also crucial to understand the legal and tax implications that come with each exit option. For instance, some transactions may be subject to capital gains tax, and any type of payout will have implications on your personal finances.
A comprehensive understanding of your business also means knowing what makes it unique – not by your opinion, but by the market’s opinion. Is it a proprietary technology, a stellar team, a robust customer base, strong brand recognition, or some other point of value in your business strategy? Identifying these unique attributes will help you position your business competitively during the exit process.
What is more, knowing your business extends to coming to terms with your role within it. Are you integral to its operation, or could the business thrive under new management? The less dependent the business on the owner, the more attractive it is to prospective buyers. Therefore, it may be beneficial to develop a management team that can run the business independently, solidifying business sustainability beyond your tenure.
2. Ensure That Finances Are in Order
Ensuring that your finances are in order is a vital step in preparing for a successful business exit. This means not only having clear, accurate, and up-to-date accounting records, but also demonstrating strong financial performance. A history of steady revenue and profitability can greatly improve your business’s attractiveness to a buyer.
Start by conducting a thorough financial audit, which may involve working with a professional accountant. Look at all areas of your business, including revenue, expenses, assets, liabilities, and cash flow. This process will help identify any potential red flags that could deter would-be buyers. Clean, accurate books give potential buyers confidence, whereas sloppy recordkeeping invites more scrutiny, less trust, and likely a lower offer.
If there are any areas of financial weakness, addressing these issues before initiating the exit process can improve your business’s value and desirability. As part of this step, you will also need to separate personal and business finances if they’re intertwined. This separation not only makes your financial reports more accurate and simpler to understand, but it also protects your personal finances in the event of a business downturn or sale.
Lastly, don’t forget about tax planning. The sale of a business can have significant tax implications. Discuss with a tax professional to identify strategies to reduce potential tax liabilities associated with your exit strategy. Proper financial and tax planning can help you maximize your profits from the sale while ensuring a smooth transaction.
3. Pay Off Creditors
Settling business debts is important if you want to plan for a smooth exit. Paying off creditors not only improves the company’s balance sheet but also boosts its attractiveness to a buyer. Buyers and their financiers are often wary of businesses with heavy debt burdens, as these liabilities could affect the company’s future profitability, cash flow, and lendability.
Start by reviewing all your liabilities – both short-term and long-term – and create a debt payment plan. Prioritize high-interest debts and those with shorter terms. If your cash flow is strong, consider making lump-sum payments or negotiating with lenders for a discounted payoff.
Remember that transparency about your debts is key when dealing with a prospective buyer. Hidden or unexpected liabilities can cause deals to fall through or decrease the sale price at the eleventh hour. Therefore, it’s crucial to disclose all your debts, even if you’re in the process of paying them off.
However, if paying off all your debts is not feasible, consider restructuring them. This might mean renegotiating terms with creditors or consolidating debts to secure lower interest rates or longer repayment terms. This can make the debt more manageable for the new owner and less of a deterrent in the sale process.
4. Remove Yourself From the Business
Eliminating over-reliance on you is a crucial step to exiting for maximum value, and requires significant planning and preparation. This process, often referred to as “depersonalizing the business,” involves reducing the company’s dependence on you for its day-to-day operations, reputation, and success.
Evaluate the areas where your involvement is most critical. Are there functions or decisions that cannot move forward without your input? Identifying these areas helps to pinpoint where new leadership, systems or training may be needed.
However, it’s a mistake to try to duplicate yourself right away. Start smaller, by evaluating what you can delegate with a reasonable amount of training or expense before you invest in bringing in senior-level expertise to replace your highest-value contributions. If you plot your personal responsibilities on the matrix below, start by delegating or systemizing from the lower left quadrant, as this the fastest, easiest and most cost-effective way to begin.
This gradual transition of duties allows the team to become more independent, and it will buy back some of your own time to find solutions to the items on the upper right side of the quadrant. This hand-off of responsibilities should be done in a structured manner, ensuring that your team is adequately trained and confident in their new roles.
If your business currently lacks a strong management team, once you’ve tackled some of the lower-skill or lower-value tasks, consider recruiting skilled individuals who are capable of taking on more significant responsibilities. Hiring experienced professionals not only enhances your business’s operational efficiency but also signals to interested buyers the company’s commitment to continuity and growth.
Don’t forget to document all your processes, systems, and methods. This documentation not only provides continuity in the event of employee turnover, but it also acts as a roadmap for the new owners, helping them understand how things are done and why. It minimizes the risk of disruption during the transition and increases the likelihood of your business maintaining its success after your exit.
5. Create a Set of Standard Operating Procedures
Creating a comprehensive set of standard operating procedures (SOPs) is vital in preparing your business for a successful exit. SOPs serve as a blueprint for how your business operates, detailing all its processes and systems in an easy-to-understand manner. This allows new employees or a new owner to grasp quickly how things work, from daily operations to more complex tasks.
To create effective SOPs, start by making a table of contents, listing all the core functions in the business, from sales to accounts receivables. The list might be long, but once it’s defined, you and the team can begin the process of chipping away at documenting every process in the business.
This involves mapping out all the tasks performed in your business, their sequence, who performs them, and how-to guides. Depending on the function, this could include a series of checklists, flow charts, images or video tutorials. Let your team help with this, as they have first-hand experience with these tasks.
Next, organize these processes into a logical and easy-to-follow structure. It could be by department, work flow, or whatever method best fits your business structure. There are a plethora of software options available to help you create and store the processes, or it could be as simple as physical binders or documents stored a shared cloud-based system. The key is to ensure that everyone can easily access and understand the SOPs – or they simply won’t be used.
Systems run the business, and people run the systems.
This ensures consistency of execution, and minimizes disruption if employees were to leave, or when it’s time for a new owner to take over.
Lastly, recognize that SOPs don’t last forever. Things change, the business grows, and systems have to evolve. Staying on top of adding or revising your SOPs regularly will not only make your existing business run more smoothly, but it can significantly increase a buyer’s confidence in your business’s sustainability and growth potential.
6. Establish (and Train) the Management Team
Establishing and training a competent management team is a pivotal step in preparing your business for a successful exit. Buyers are often more attracted to a business that can run independently of its owner, signaling a lower risk and higher sustainability.
As business growth expert, Brad Sugars puts it – think of your General Manager like the jockey. A professional jockey knows how to get the best out of a racehorse, whereas an inexperienced rider can make even a purebred champion perform like an amateur.
The first step is to identify the key positions in your company that would be instrumental for its operation if you weren’t there. If you don’t already have a management team in place, this is the time to assess the potential in your current staff, and develop those who demonstrate the desire and aptitude to grow. However, it might also be necessary to recruit professionals who bring a level of experience that doesn’t currently exist in the business. Look for individuals who not only have the necessary skills but also align with your company’s culture and values.
In addition to formal training, gradually delegate your responsibilities to the management team. This should be done strategically, starting with less critical tasks and gradually moving to more significant roles. This process allows the team to acclimatize to their new responsibilities while demonstrating the team’s abilities to operate the business independently.
7. Draw Up a List of Potential Buyers
Creating a list of possible buyers is a valuable step in preparing your business for a successful sale. Start by identifying the ideal buyer profile for your business. This could be competitors, complementary businesses, or entrepreneurs looking to enter your industry. It’s essential to consider not just their financial capacity but also their strategic fit—does your business align with their current portfolio or growth strategy?
Next, conduct thorough research to identify potential buyers that fit this profile. This could involve online research, industry events, networking, or even hiring a business broker or M&A advisor with a large network of contacts.
A business broker can help you approach contacts on this list professionally and discretely, or attract other buying prospects that fit the same profile. It’s important to maintain confidentiality during this process to minimize disruption to your business.
When to Use an Exit Strategy
Improve Company’s Future
Devising an exit strategy can be an integral part of improving your company’s future, even if you don’t plan to depart immediately. This strategy not only provides a clear roadmap for potential transitions but also helps in enhancing business operations and value in the present.
If you build a business that is sellable, you have options. Either you get to exit on your terms, or you decide to keep it – but now it works for you, rather than you working for it.
An exit strategy encourages owners to focus on aspects that contribute to the company’s long-term success, such as streamlined processes, a strong management team, financial performance, and sustainable growth. These factors can attract possible buyers while simultaneously improving business efficiency and profitability.
Moreover, an exit strategy provides a safety net for unforeseen circumstances. In the event of sudden changes such as market shifts or personal circumstances, a well-planned exit ensures that you’re prepared to sell or transition the business under the most favorable conditions possible.
Make a Profit
Your business should pay you in two ways: as you run it, and again when you exit.
A well-executed exit strategy can generate substantial profit, rewarding you for the time, effort, and resources invested into building your business. One of the primary reasons business owners implement an exit strategy is the potential for a lucrative sale that provides financial security.
To maximize profitability, concentrate on enhancing your business’s value drivers such as above-average gross margins, a robust customer base with maximum potential for repeat business, and proprietary technology or competencies. Companies with strong value drivers typically command higher prices in the marketplace.
Additionally, ensuring your business can operate independently of you as the owner adds value. This demonstrates to a future buyer that the business will continue to generate profit even after your exit, making it a more attractive investment.
Keep in mind, though, that profitability is not just about earning the highest price at sale. It’s also about minimizing transaction costs and ensuring that the business transition doesn’t disrupt its ongoing operations, safeguarding the company’s profitability in the long term.
Another critical aspect of an exit strategy is its potential to limit losses. In certain situations, such as a deteriorating market landscape or falling profitability, exiting the business can be the most pragmatic decision to prevent further financial losses for an owner who is unwilling or unable to invest in a turnaround strategy.
By planning an exit strategy, you can identify the warning signs that indicate it’s time to leave the market before you get to the point where liquidation or bankruptcy are your only options. Warning signs may include consistent negative cash flow, a shrinking customer base, or new competitors who threaten your market share. In such scenarios, a planned exit can help recover part or all of your initial investment and minimize the overall impact on your personal finances.
Moreover, a strategic exit can also protect your reputation as a business owner, since it demonstrates foresight, financial wisdom, and decisiveness. This can be beneficial for any future entrepreneurial ventures you undertake.
Post-Exit Reflection and Next Steps
While you might think that selling your business will be the pinnacle of happiness, the truth is, many business owners suffer an identity crisis once the sale is complete. You’ve invested years – perhaps decades – into building this amazing asset, and now you’re observing as new leadership takes the reigns and you simply don’t know what to do with your time. This is why it’s critical that you’re not only planning for what you’re leaving behind, but also for what you’re moving toward next – be that retirement hobbies, new interests, volunteer work, or planning the next business venture.
Take time to reflect on your entrepreneurial journey, taking an honest look at your successes, challenges, and lessons learned can provide valuable insights for future endeavors or life goals. Perhaps there were aspects of running your business that you thoroughly enjoyed and performed well in, or maybe there were areas that were particularly challenging. Reflecting on these experiences can help you identify your strengths and weaknesses, providing a roadmap for personal and professional development.
Regardless of what your next steps look like, it’s important to remember that exiting a business doesn’t signify the end of your journey. Instead, it marks the beginning of a new chapter, brimming with opportunities for growth and personal fulfillment.
What is the most common exit strategy?
The most common type of exit strategy for businesses is to sell your company to another established business. This can often result in a significant financial return for the original business owner. Other common exit strategies include selling to a private equity firm, management buyouts (MBO), where a company’s existing management team purchases the business, and initial public offerings (IPOs), where a company is selling shares to the public. The choice of exit strategy largely depends on the specific circumstances of the business and the goals of the owner.
What is the simplest exit strategy?
The simplest exit strategy, which is not ideal for many business owners, is often a liquidation or simply closing the business. This approach is simply ending operations and selling off the company’s assets. While it may not be the most financially rewarding, it provides an easy way to close a business and cover most or all outstanding debts, with minimal complications.
This strategy is commonly employed by a very small business or sole proprietorship, where the business heavily relies on the owner’s involvement and cannot continue operating in their absence, hence having no value to a future buyer. It’s worth noting, though, that even in this straightforward approach, it’s crucial to ensure all debts are paid, customer promises are kept, and legal obligations are met to avoid any future issues.
What resources and professionals might assist me in planning and executing my exit strategy?
Several resources and professionals play a crucial role in planning and executing a successful exit strategy. These include:
- Business Coaches: Professional coaches provide valuable insights and guidance to help you design and prepare your business for you to exit. For example, our firm follows proven systems and best practices to help you maximize your valuation, and avoid common pitfalls.
- Lawyers: They ensure that all legal aspects of the sale, such as contracts and agreements, are in order, and that your rights and personal interests are protected.
- Accountants: These professionals can add massive value in the financial analysis of your business, preparing accurate records for a smoother negotiation process, and helping you prepare for the tax implications of the sale.
- Financial Advisors: They can help you set a target goal for business valuation that will fulfill your personal financial goals, as well as advice on managing or investing the proceeds from the sale to ensure your financial stability post-exit.
Depending on your personal situation and preferences, it can also be wise to consult with other mentors, whether professional, personal, or spiritual, as you navigate one of the biggest transitions of your business and life.