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Start » strategy, ready to move on how to create an exit plan for your business.
Exit plans are necessary to secure a business owner’s financial future, but many don’t think to establish one until they’re ready to leave.
An exit strategy is an important consideration for business owners, but it’s often overlooked until significant changes are necessary. Without planning an exit strategy that informs business direction, entrepreneurs risk limiting their future options. To ensure the best for your business, plan your exit strategy before it’s time to leave.
What is an exit strategy?
An exit strategy is often thought of as the way to end a business — which it can be — but in best practice, it’s a plan that moves a business toward long-term goals and allows a smooth transition to a new phase, whether that involves re-imagining business direction or leadership, keeping financially sustainable or pivoting for challenges.
A fully formed exit strategy takes all business stakeholders, finances and operations into account and details all actions necessary to sell or close. Exit strategies vary by business type and size, but strong plans recognize the true value of a business and provide a foundation for future goals and new direction.
If a business is doing well, an exit strategy should maximize profits; and if it is struggling, an exit strategy should minimize losses. Having a good exit strategy in practice will ensure business value is not undermined, providing more opportunities to optimize business outcomes.
[Read more: What Is a Business Valuation and How Do You Calculate It? ]
Benefits of an exit strategy
Planning a complete exit strategy well before its execution does more than prepare for unexpected circumstances; it builds purposeful business practices and focuses on goals.
Even though a plan may not be used for years or decades, developing one benefits business owners in the following ways:
- Making business decisions with direction . With the next stage of your business in mind, you will be more likely to set goals with strategic decisions that make progress toward your anticipated business outcomes.
- Remaining committed to the value of your business . Developing an exit strategy requires an in-depth analysis of finances. This gives a measurable value to inform the best selling situation for your business.
- Making your business more attractive to buyers . Potential buyers will place value in businesses with planned exit strategies because it demonstrates a commitment to business vision and goals.
- Guaranteeing a smooth transition . Exit strategies detail all roles within a business and how responsibilities contribute to operations. With every employee and stakeholder well-informed, transitions will be clear and expected.
- Seeing through business — and personal — goals after exit . Executing an exit strategy that’s right for your business’s value and potential can prevent unwanted consequences of exit, like bankruptcy.
Because leaving your business can be emotional and overwhelming, planning a proper exit strategy requires diligence in time and care.
Weighing your options: closing vs. selling
There are two strategies to consider for your exit plan.
Sell to a new owner
Selling your business to a trusted buyer, such as a current employee or family member, is an easy way to transition out of the day-to-day operations of your business. Ideally, the buyer will already share your passion and continue your legacy.
In a typical seller financing agreement, the seller will allow the buyer to pay for the business over time. This is a win-win for both parties, because:
- The seller will continue to make money while the buyer can start running the show without a huge upfront investment;
- The seller may also remain involved as a mentor to the buyer, to guide the overall business direction; and
- The transition for your employees and customers will be a smooth one since the buyer likely already has a stake in the business.
However, there are downsides to selling your business to someone you know. Your relationship with the buyer may tempt you to compromise on value and sell the business for less than what it’s worth. Passing the business to a relative can also potentially cause familial tensions that spill into the workplace.
Instead, you may choose to target a larger company to acquire your business. This approach often means making more money, especially when there is a strong strategic fit between you and your target.
The challenge with this option is the merging of two cultures and systems, which often causes imbalance and the potential that some or many of your current employees may be laid off in the transition.
[Read more: 5 Things to Know When Selling Your Small Business ]
Liquidate and close the business
It’s hard to shut down the business you worked so hard to build, but it may be the best option to repay investors and still make money.
Liquidating your business over time, also known as a “lifestyle business,” works by paying yourself until your business funds run dry and then closing up shop.
The benefit of this method is that you will still get a paycheck to maintain your lifestyle. However, you will probably upset your investors (and employees). This method also stunts your business’s growth, making it less valuable on the market should you change your mind and decide to sell.
The second option is to close up shop and sell assets as quickly as possible. While this method is simple and can happen very quickly, the money you make only comes from the assets you are able to sell. These may include real estate, inventory and equipment. Additionally, if you have any creditors, the money you generate must pay them before you can pay yourself.
Whichever way you decide to liquidate, before closing your business for good, these important steps must be taken:
- File your business dissolution documents.
- Cancel all business expenses that you no longer need, like registrations, licenses and your business name.
- Make sure your employee payment during closing is in compliance with federal and state labor laws.
- File final taxes for your business and keep tax records for the legally advised amount of time, typically three to seven years.
Steps to developing your exit plan
To plan an exit strategy that provides maximum value for your business, consider the six following steps:
- Prepare your finances . The first step to developing an exit plan is to prepare an accurate account of your finances, both personally and professionally. Having a sound understanding of expenses, assets and business performance will help you seek out and negotiate for an offer that’s aligned with your business’s real value.
- Consider your options . Once you have a complete picture of your finances, consider several different exit strategies to determine your best option. What you choose depends on how you envision your life after your exit — and how your business fits into it (or doesn’t). If you have trouble making a decision, it may be helpful to speak with your business lawyer or a financial professional.
- Speak with your investors . Approach your investors and stakeholders to share your intent to exit the business. Create a strategy that advises the investors on how they will be repaid. A detailed understanding of your finances will be useful for this, since investors will look for evidence to support your plans.
- Choose new leadership . Once you’ve decided to exit your business, start transferring some of your responsibilities to new leadership while you finalize your plans. If you already have documented operations in practice in your business strategy, transitioning new responsibilities to others will be less challenging.
- Tell your employees . When your succession plans are in place, share the news with your employees and be prepared to answer their questions. Be empathetic and transparent.
- Inform your customers . Finally, tell your clients and customers. If your business will continue with a new owner, introduce them to your clients. If you are closing your business for good, give your customers alternative options.
The best exit strategy for your business is the one that best fits your goals and expectations. If you want your legacy to continue after you leave, selling it to an employee, customer or family member is your best bet. Alternatively, if your goal is to exit quickly while receiving the best purchase price, targeting an acquisition or liquidating the company are the optimal routes to consider.
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What is an exit plan (and why every business owner needs one).
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As a business owner, one of the last things you usually want to think about is parting ways from your company. Preparing to say goodbye to it can feel like losing a part of you.
And for many, planning to sell what is often your largest asset is frightening. It means looking at reality - and for many, this is a difficult step.
However, the alternative is much more frightening. With no exit plan, you risk falling short of your family’s long-term goals and aspirations.
- Suhail Doshi, chief executive officer, Mixpanel
At MidStreet, we have counseled many business owners through creating an exit plan for their business.
In this post, we will cover what exit planning is, what is involved, why you should do it, the components of an exit plan, and who can help you create one. By knowing these key details, you will begin to understand how an exit plan fits into your life and sets up a successful future for you and your family.
What is Exit Planning?
At its most basic level, an exit plan defines your current state , establishes your goals and timeframe for selling , and sets a roadmap to get you from where you are to where you want to be in that timeframe .
At a minimum, you should try to plan your exit from your business a year in advance. For best results, you should start 3-5 years in advance.
Exit plans will vary in complexity and time frame. Some exit plans include 2/5/10 year business and personal goals, financial projections, a summary of the owner’s tax consequences, estate planning, and specific key performance indicators (KPIs) that must be achieved to meet those goals. Others might just be a statement of the business’s current value, a goal value, an exit date, and a rough idea of what financial performance the business needs to achieve that value.
Exit planning doesn’t have to be time-consuming and complex. It is mainly about learning how businesses are priced, thinking about your future, and understanding the small changes you can make to reach your goals.
Being detailed and thorough for some will be a necessity, but in the great words from Brian Tracy’s Goals!: How to Get Everything You Want Faster Than You Ever Thought Possible :
- Brian Tracy
Why You Should Exit Plan
You only get one shot to sell this business. You may sell multiple businesses in your life - but you only have one chance to sell this one.
The consequences of the sale will impact your financial future, reputation in the community, relationships with employees, and several aspects of your daily life.
By creating a plan early on, you will be financially and emotionally prepared for your next endeavor after you sell, whether that be retirement or another business opportunity.
Exit planning makes these details more certain because it:
- Helps you understand the process of a sale in advance
- Makes your transition out of the company easier
- Makes it an easier transition for your employees
- Forces you to identify business weaknesses
- Gives you more realistic expectations of the sale
- Helps you emotionally prepare for the sale
- Reduces the time it is going to take to sell
- Reduces the taxes of your sale
- Increase the value of the company you are selling
Almost any problem can be solved if you identify it early enough. By not planning ahead of time, you are risking your ability to sell in the future.
- John C. Maxwell
What is The Process of Exit Planning?
The process of exit planning is broken down into three major steps:
Step 1: Establish where you are
Step 2: Establish where you want to go (timeline, financial, etc.)
Step 3: Make a plan to get there
The best place to start your exit plan is with your wealth advisor, business intermediary, and CPA.
First, sit down with a trusted M&A advisor and perform a business valuation. Once you have a valuation, consult with your CPA and discuss the tax consequences of your sale. Finally, meet with your wealth advisor, share the findings of your CPA and M&A advisor, and discuss your personal goals for the future.
Then, determine with your advisor's assistance how far off your goals you currently are, and make a plan to reach those goals.
What Are The Key Components of an Exit Plan?
There are six main components of an exit plan:
1. Business Valuation
This is the most critical component of the entire exit plan. Without an idea of how your business is priced and where it’s at today, you won’t be able to effectively make changes to get where you want to go.
Want to figure out the value of your business? Speak to us about getting a free valuation today.
2. Summary on The Current State of The Business
In the summary of the current state of your business, you will include things like:
- How involved in the business you are
- The stability of your revenue streams
- The level of customer concentration you have, if any
- Business risks and strengths
- The tenure of your employees
- The level of documentation you have on operations
- The quality of your supplier relationships
These are just a few examples, but the details included will differ based on your type of business and how it is structured. Be as honest as possible about where things are at today, so you can clearly set goals for what is important.
3. Personal Goal Statement
Your personal goal statement will consist of business, family, estate, and personal goals. You will frame the statement of your goals as it relates to the sale of your company and when you would realistically want to sell.
You should consider things like “When do I want to sell?” and “What do I want my life to look like as it relates to the business and the eventual sale of it?”
As for writing the goals, there are several different methods you can select - we prefer the teachings from Brian Tracy’s Goals! How to Get Everything You Want - Faster Than You Ever Thought Possible.
4. Factors Driving the Value of the Company
Once you have a business valuation done, make sure you understand what is driving the value of your company. Ask questions if something doesn’t seem clear, and learn what factors can make your business more marketable when the time comes to sell.
In your exit plan, name the factors that are driving the company’s value, and set your action plan around maximizing these factors.
5. Create an Action Plan
Once you have identified your goals, you need to create your action plan to achieve them.
Let’s say your goal is to pass the business down to your daughter in 5 years. An example of your action plan could be:
Action Plan: This year I will promote my daughter to operations manager and pair her with an experienced leadership coach who is familiar with our industry to hone her leadership skills.
Based on your specific goals, your merger and acquisition (M&A) advisor or exit planning advisor will be able to assist you in thinking through this action plan.
6. Review Your Exit Plan on a Regular Basis
How regular? Most wisdom on goal setting and achievement would say every day if you’re serious about achieving them. Or in Les Brown’s opinion:
- Les Brown
However, goals are only one part of your exit plan. We would recommend reviewing the entire plan at least once a quarter, but keep your eye on the goals you are looking to achieve with your plan.
Who Can Help You Plan Your Exit?
There are six types of people that can help you create an exit plan for your business:
You are the only person who can initiate the exit plan - which is why so many owners fail to exit plan. Do not think you can just hire someone to do this for you.
You can take the free exit planning sheet we put together, get a valuation , and you will be 80% of the way there.
Depending on how your business is structured, you may need to speak to a CPA about restructuring your corporate entity. Business owners with C-corps can face double taxation if they sell their business in an asset sale.
Even if you do not need to change the corporate structure of your business, you should still consider consulting a CPA to discuss if you may need to change the way you are reporting your income. They can help your clean up your balance sheet to correctly show what you are earning.
An attorney can speak to you about what you may want to change before the sale of your business. For instance, you may want to move assets around that your current corporation owns.
If you own real estate not related to the business, in the business entity you are selling, an attorney can help you transfer those assets out of the current one into a different one prior to selling. This is important to do before you go to sell.
4. M&A Advisor
Your M&A advisor can help you see things from a 10,000-foot view to understand what you need to do to prepare to sell. They can bring up common issues you may face when you go to sell based on your individual company characteristics.
They will also walk you through your business valuation and explain how your business is valued and how the current market would price it.
5. Wealth Manager
A wealth manager can help you figure out what your financial picture looks like, what you can do with your money, what you need to retire.
By knowing these figures, you will be able to plan out your financial future and further structure your exit plan to achieve your financial goals.
6. Exit Planning Advisor
An exit planning advisor can help keep you on track with your plan from start to finish. Since they specialize in helping business owners exit their business, they will be able to clear up any questions you have about the exit planning process.
Create an Exit Plan to Sell on Your Terms
Exit planning is a process that will help you remove the uncertainty from the future sale of your business. By knowing what an exit plan is, what it is composed of, and who can help you create one, you can get started on successfully planning your exit.
Preparing your exit plan can be an emotionally daunting task, just like deciding to sell your business. Learn more about the emotions that may arise by reading “ The Emotions of Selling a Business .”
We have helped many business owners prepare for their exit ahead of time so that they could sell their business successfully. If you are thinking about planning your exit from your business, give us a call today.
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Business Exit Plan & Strategy Checklist | A Complete Guide
It’s not enough to merely hand over the keys at the closing. You need a strategy. An exit strategy.
An exit strategy, as the term implies, is a plan to assist you in exiting your business. All exit plans will vary, but they all contain common elements.
The three common elements that all business exit strategies should contain are:
- A valuation of your company. The process of valuing your company involves three steps, the first being an assessment of the current value of your business. Once this value is calculated, you should plan how to both preserve and increase that value.
- Your exit options. After you have determined a range of values for your company and developed plans for preserving and increasing this value, you can begin exploring your potential exit options. These can be broken down into inside, outside, and involuntary exit options.
- Your team. Finally, you should form a team to help you prepare and execute your exit plan. Your team can consist of an M&A advisor, attorney, accountant, financial planner, and business coach.
If you are considering selling your business in the near future, planning for the sale is imperative if you want to maximize the price and ensure a successful transaction. This article will give you a solid understanding of these elements and how you can put them together to orchestrate a smooth exit from your business.
Table of Contents
- Measure the Value
Preserve the Value
Increase the value, inside exit options, outside exit options, involuntary exit options, team members, the annual audit, business exit plan strategy component #1: valuation.
Your exit strategy should begin with a valuation, or appraisal, of your company. The process of valuing your company involves three steps, the first being an assessment of the current value of your business. Once this value is calculated, you should then plan how to both preserve and increase the value of your business.
Let’s explore each of these components — assess, preserve, increase — in more depth.
Assess the Value
The first step in any exit plan is to assess the current value of your business.
Here are questions to address before beginning a valuation of your company:
- Who will value your company?
- What methods will that person use to value your company?
- What form will the valuation take?
Who: Ideally, whoever values your company should have real-world experience buying and selling companies , whether through business brokerage, M&A, or investment banking experience. They should also have experience selling companies comparable to yours in size and complexity. Specific industry experience related to your business is helpful, but not essential, in our opinion. There are loads of professionals out there who possess the academic qualifications to appraise your business but who have never sold a company in their lives. These individuals can include accountants or CPAs, your financial advisor, or business appraisers. It is essential that your appraiser have real-world M&A experience. Without hands-on experience buying and selling companies comparable to yours, an appraiser will be unprepared to address the myriad nuances of the report or field the dozens of questions that will arise after preparing the valuation.
Action Step: Ask whoever is valuing your business how many companies they have sold and what percentage of their professional practice is devoted to buying and selling businesses versus other activities.
What Methods: Most business appraisers perform business valuations for legal purposes such as divorce, bankruptcy, tax planning, and so forth. These types of appraisals differ from an appraisal prepared for the purpose of selling your business. The methods used are different , and the values will altogether be different as well. By hiring someone who has real-world experience selling businesses, as opposed to theoretical knowledge regarding buying and selling businesses, you will work with someone who will know how to perform an appraisal that will stand the test of buyers in the real world.
Form: Your M&A business valuation can take one of two forms:
- Verbal Opinion of Value: This typically involves the professional spending several hours reviewing your financial statements and business, then verbally communicating an opinion of their assessment to you.
- Written Report: A written report can take the form of either a “calculation of value” or a “full report.” A calculation of value cannot be used for legal purposes such as divorce, tax planning, or bankruptcy, but for the purpose of selling a business, either type is acceptable.
Is a verbal or written report preferable? It depends. A verbal opinion of value can be quite useful if you are the sole owner and you do not need to have anyone else review the valuation.
The limitations of a verbal opinion of value are:
- If there are multiple owners, there may be confusion or disagreement regarding an essential element of the valuation. If a disagreement does arise, supporting documentation for each side will be necessary to resolve the disagreement.
- You will not have a detailed written report to share with other professionals on your team, such as attorneys , your accountant, financial advisor, and insurance advisor.
- The lack of such a detailed report makes it difficult to seek a second opinion, as the new appraiser will have to start from scratch, adding time and money to your process.
For the reasons above, we often recommend a written report, particularly if you are not planning to sell your business immediately.
We have been involved in situations in which CPA firms have valued a business but had little documentation (one to two pages in many cases) to substantiate the basis of the valuation.
In one example, the CPA firm’s measure of cash flow was not even defined; it was simply listed as “‘cash flow.” This is a misnomer as there are few agreements regarding the technical definition of this term. As a result, any assumption we might have made would have led to a 20% to 25% error at minimum in the valuation of the company. By having a written report in which the appraiser’s assumptions are documented, it is simple to have these assumptions reviewed or discussed.
Note: When hiring someone to value your company, you are paying for a professional’s opinion but keep in mind that this opinion may differ from a prospective buyer’s opinion. Some companies have a narrow range of value (perhaps 10% to 20%), while other companies’ valuations can vary wildly based on who the buyer is, often by up to 100% to 200%. By having a valuation performed, you will be able to understand the wide range of values that your company may attain. As an example, business appraisers’ valuations often contain a final, exact figure, such as $2,638,290. Such precision is misleading in a valuation for the purpose of a sale. We prefer valuations that result in a more realistic price range, such as $2,200,000 to $2,800,000. An experienced M&A professional can explain where you will likely fall within that range and why.
Once you have established the range of values for your company, you should develop a plan to “preserve” this value. Note that preserving value is different from increasing value. Preserving value primarily involves preventing a loss in value.
Your plan should contain clear strategies to prevent catastrophic losses in the following categories:
- Litigation: Litigation can destroy the value of your company. You and your team should prepare a plan to mitigate the damaging effects of litigation. Have your attorney perform a legal audit of your company to identify any concerns or discrepancies that need to be addressed.
- Losses you can mitigate through insurance: Meet with your CPA, attorney, financial advisor, and insurance advisor to discuss potential losses that can be minimized through intelligent insurance planning. Examples include your permanent disability, a fire at your business, a flood, or other natural disasters, and the like.
- Taxes: You should also meet with your CPA, attorney, financial advisor, and tax planner to mitigate potential tax liabilities.
Important: The particulars of your plan to preserve the value of your company also depend on your exit options, which we will discuss below. Many elements of your exit plan are interdependent. This interdependency increases the complexity of the planning process and underscores the importance of a team when planning your exit.
Only after you have taken steps to preserve the value of your company should you begin actively taking steps to increase the value of your company.
There is no simple method or formula for increasing the value of any business. This step must be customized for your company.
This plan begins with an in-depth analysis of your company, its risk factors, and its growth opportunities. It is also crucial to determine who the likely buyer of your business will be . Your broker or M&A advisor will be able to advise you regarding what buyers in the marketplace are looking for.
Here are some steps you can take to increase the value of your business:
- Avoid excessive customer concentration
- Avoid excessive employee dependency
- Avoid excessive supplier dependency
- Increase recurring revenue
- Increase the size of your repeat-customer base
- Document and streamline operations
- Build and incentivize your management team
- Physically tidy up the business
- Replace worn or old equipment
- Pay off equipment leases
- Reduce employee turnover
- Differentiate your products or services
- Document your intellectual property
- Create additional product or service lines
- Develop repeatable processes that allow your business to scale more quickly
- Increase EBITDA or SDE
- Build barriers to entry
Note: A professional advisor can help you ascertain and prioritize the best actions for your unique situation to increase the value of your business. Unfortunately, we have seen owners of businesses spend three months to a year on initiatives to increase the value of their business, only to discover that the initiatives they worked on were unlikely to yield any value to a buyer.
Business Exit Strategy Component #2: Exit Options
After you have determined a range of values for your company and developed plans for preserving and increasing this value, you can begin exploring your potential exit options.
Note: These steps are interdependent. You can’t determine your exit options until you have a baseline valuation for your company, but you can’t prepare a valuation for your business until you have explored your exit options. A professional can help you determine the best order to explore these steps, or if the two components should be explored simultaneously. This is why real-world experience is critical.
All exit options can be broadly categorized into three groups:
- Inside: Buyer comes from within your company or family
- Outside: Buyer comes from outside of your company or family
- Involuntary: Includes involuntary situations such as death, divorce, or disability
Inside options include:
- Selling to your children or other family members
- Selling to your business to your employees
- Selling to a co-owner
Inside exits require a professional who has experience dealing with family businesses, as they often involve emotional elements that must be navigated and addressed discreetly, gracefully, and without bias. Inside exit options also greatly benefit from tax planning because if the money used to buy the company is generated from the business, it may be taxed twice. Lastly, inside exits also tend to realize a much lower valuation than outside exits. Due to these complexities, most business owners avoid inside exits and choose outside options. Fortunately, most M&A advisors specialize in outside exit options.
Outside exit options include:
- Selling to a private individual
- Selling to another company or competitor
- Selling to a financial buyer, such as a private equity group
Outside exits tend to realize the most value. This is also the area where business brokers, M&A advisors, and investment bankers specialize.
Involuntary exits can result from death, disability, or divorce. Your plan should anticipate such occurrences, however unlikely they may seem, and include steps to avoid or mitigate potential adverse effects.
Business Exit Strategy Component #3: Team
Finally, you should form a team to help you plan and execute your exit plan. Many of these steps are interdependent — they are not always performed sequentially, and some steps may be performed at the same time. Forming a team will help you navigate the options and the sequence.
Your team should involve the following:
- M&A Advisor/Investment Banker/Business Broker: If you are considering an outside exit.
- Estate planning
- Financial planning
- Tax planning, employee incentives, and benefits
- Family business
- Accountant/CPA: Your accountant should have experience in many of the same areas as your attorney, along with audit experience and retirement planning. Again, it is unlikely that your CPA possesses all of the skills you need. If further expertise is needed, the CPA should be able to access the skills you need, either through colleagues at their firm or by referral to another accountant.
- Financial Planner/Insurance Advisor: This team member is critical. We were once in the late stages of a sale when the owner suddenly realized that, after deducting taxes, his estimated proceeds from the sale would not be enough to retire on. An experienced financial planner can help with matters like these. They should have estate and business continuity planning experience, as well as experience with benefits and retirement plans.
- Business Coach: A business consultant or coach may be necessary to help implement many of the changes needed to increase the value of your business, such as building infrastructure and establishing a strong, cohesive management team. Doing this often requires someone who can point out your blind spots. A coach can help you take these important steps.
Where to find professionals for your team
The best way to find professionals for your team is through referrals from trusted friends and colleagues who have personally worked with the professional in question. Don’t ignore your intuition, however. It’s important that you and your team members have good chemistry.
We recommend that you assemble your professional advisors for an annual meeting to perform an audit of your business. The goal of this audit is to prevent and discover problems early on and resolve them. As the saying goes, “An ounce of prevention is worth a pound of cure.”
Your advisors are a valuable source of information. This annual meeting is an opportunity to ensure that they’re all on the same page and that there are no conflicts among your legal, financial, operational, and other plans. An in-person or virtual group meeting enables you to accomplish this quickly and efficiently.
A sample agenda might include a review of the following:
- Your operating documents
- New forms of liability your business has assumed
- Any increase in value in your business and changes that need to be made, such as increases in insurance or tax planning
- Capital needs
- Insurance requirements and audit, and review of existing coverages to ensure these are adequate
- Tax planning — both personal and corporate
- Estate planning — includes an assessment of your net worth and business value, and any needed adjustments
- Personal financial planning
If you are contemplating selling your business, creating an exit plan will answer these critical questions:
- How much is my business worth? To whom?
- How much can I get for my business? In what market?
- How much do I need to make from the sale of my business to meet my goals?
Taking the strategic steps discussed in this article — assembling a stellar professional team and optimizing the team’s collective experience — will get you well on your way toward successfully selling your business and turning confidently toward your next adventure.
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What Is Business Exit Planning and Who Needs to Do It?
If you are even considering setting up an exit plan , the first step is to contact a qualified advisor. This person will work to understand your timeline, your financial situation, and your goals.
Your advisor will run through a few different scenarios and attach a value to each exit strategy . The business valuation method is different for each strategy. At that point, you’ll discuss which is the best option given the circumstances.
From there, it remains to be seen what will happen next. After determining your business value , you may decide that you still have work to do and that you are not in a healthy place to sell . On the other hand, you might realize that you’re in a good place and should begin implementing your exit strategy . Your team of advisors can begin working to find a buyer if that is what your strategy calls for.
It’s worth noting that implementing these strategies can take time. Believe it or not, family succession plans — having the next generation take over — and ESOPs can take up to 10 years to complete.
The quickest exit strategy is usually to sell to an outsider. It can also be the most lucrative but can cost the most in terms of both fees and taxes.
A trusted advisor can run through various scenarios to determine the impact each would have on your business. The most important thing is that you gather an abundance of information so that you can make an informed decision. The earlier you’re able to start this process, the better off you will likely be in the long run.
Who Is Exit Planning For and When Should Planning Begin?
Even if you don’t plan on selling your business now — perhaps the timing isn’t right or you’re not done growing — it’s a good idea to do a bit of homework regarding your exit strategy . You never know when your priorities or goals will change. When it comes to exiting a business, it’s better to be over-prepared than scrambling.
Discussing your exit strategy with a qualified advisor can serve as a form of an internal audit. It allows you to see what you need to do to improve your business moving forward, and it can help eliminate the valuation gap if you move to sell.
Planning also allows for business continuity when the exit occurs. Hopefully, you will have worked through many of the pain points and inevitable questions ahead of time , therefore allowing a smooth transition from one ownership group to the other. Lastly, these internal audits can help you to come up with contingency plans to help protect the company you’ve worked so hard to grow.
A full business exit planning process can be a particularly good exercise for larger small businesses — such as those with $25M or more in annual sales — with owners who have already built significant wealth from owning the business. Generally speaking, most businesses in the lower-middle market — those with $5 million to $25 million in annual sales — have maybe one or two exit options that will work for them, not six or seven.
When it comes to exit planning , it’s all about finding a good fit. Owners need to be realistic about what will work given their business and situation. A lot of business owners may want to do an ESOP, or a management buyout , only to later discover that it’s not the best option for their situation. This is why owners need to start exit planning early.
Ideally, exit planning would start no less than five years before you plan to leave. In a perfect world, you will have the groundwork completely in place two years before you plan to exit. This should allow a seamless transition, no matter which direction you take.
Also, remember that some options like ESOPs can take up to 10 years to complete. This is why it’s crucial to continually think about your business exit strategy plans, even if your departure is not on the immediate horizon.
Ultimately, the key is to figure out which exit options are available to you and be realistic about the process. Every business owner owes it to themselves and their company to enumerate their most important goals for the exit (financial and otherwise) and start working on a business valuation . Those are the first two steps. And every business owner can do this.
Start Planning Your Business Exit Strategy Today
As a business owner , you may not think that business exit planning is necessary right now. However, it’s never too early to do so. There are many different exit strategies available, each depending on factors ranging from your personal situation and goals to your company’s cash flow . The earlier you discover which options are available to you, the easier it is to plan future business strategies.
If you’re looking for a team of experts to guide you through the process of selling, Allan Taylor & Company specializes in valuing and selling businesses in the lower-middle market, working on M&As nationwide.
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Exit Strategies - All You Need to Know about Business Exit Planning
Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry. As a former M&A advisor with over a decade of experience, Kison developed DealRoom after seeing first hand a number of deep-seated, industry-wide structural issues and inefficiencies.
The question, “What is your exit plan?” tends to draw blank expressions when asked to business owners.
A survey of business owners conducted by the Exit Planning Institute shows that a startling 2 out of 10 businesses that are listed for sale eventually close a transaction, and of these, around a half end up closing only after significant concessions have been made by the seller.
Business owners need to think about exit planning before searching for potential buyers. The tools provided by DealRoom can be a valuable asset to any business owner looking to develop an exit strategy.
By working with a team of professional advisors, accountants, lawyers, and brokers, you can ensure the right documents are in place for a business exit whenever the time comes.
In this article, we talk about creating a business exit plan and how to make one for your business.
What is a Business Exit Strategy?
A business exit strategy outlines the steps that a business owner needs to take to generate maximum value from selling their company. A well-designed business exit strategy should be flexible enough to allow for unforeseen contingencies and account for the fact that business owners don’t always decide on their own terms when to exit. By creating a strategy in advance, owners can ensure that they can at least maximize value in the event of an unplanned exit from the business.
Investor exit strategy
An investor exit strategy is similar to that of a business exit strategy. However, investors look for a financial return on their exit from a company, so bequeathing is never one of the options considered. An investor will often have a list of potential acquirers in mind, as well as a timeframe, as soon as their investment is made. In this type of scenario, there is often an exit multiple in mind (i.e. a multiple of EBITDA or a multiple of the original investment made in the business).
Venture capital exit strategy
Another business exit strategy option is a venture capital exit strategy. As our article on venture capital outlines, if a company is venture funded then consider that your investor will have a pre-planned exit. As an early stage company, this is a natural part of taking investments. Usually, with a VC investment, the aim is for an exit after five years, either through an industry sale or an IPO, where they can liquidate their original equity investment.
Motives for Developing Exit Strategies
Technically, it is important for equity owners to have a broad outline of what an exit would look like. For example, the image below represents various motives ranging from financial gain to mitigating environmental risk.
Some of the common motives for business exit include the following:
Retirement - Arguably the most common reason of all motives is retirement. Business owners will inevitably retire at some stage, and it’s best that they have an exit strategy in place before doing so.
Investment return - A business exit strategy as part of a wider investment strategy - for example, the VC company planning to go to IPO after five years - makes the exit valuation part a component of the initial investment in the business.
Loss limit -A business exit is ultimately a kind of real option for a business. If the business is hemorrhaging money, the best option may be to exit immediately - ‘cutting your losses’ on the business, a sit was.
Force majeure - Like the examples of Covid-19 and Russia’s invasion of Ukraine, sometimes an investor or owner doesn’t really have a choice: The circumstances dictate that they have to exit.
Types of Exit Strategies
Sale to a strategic buyer
Strategic buyers are usually in the same industry as the company whose owner is looking to exit. And in other cases, the buyer can be in an adjacent market looking to compliment their products in an existing market, or expansion of their products into a market.
Sale to a financial buyer
Financial buyers are solely looking for a financial return from their investment in a business and the exit is the primary means of achieving this return. Examples include venture capital and private equity investors.
Initial Public Offering (IPO)
This form of exit, far more common with startups than mature companies, enables company owners to exit by selling their equity to investors in public equity markets.
Management buyout (MBO)
An exit through MBO would occur when the owner sells the company to its current management team, whose familiarity with the business technically should make them the best candidates to achieve value from an acquisition.
Leveraged buyout (LBO)
A leveraged buyout occurs when a buyer takes a loan or debt to purchase another company. The buyer also uses a combination of their assets and the acquired company's assets as collateral. Financial models can be used for multiple scenarios and simulations of when an LBO is an effective choice.
Liquidation can be used by a business owner to exit if they feel like the liquidation would yield cash faster or that the individual assets (i.e. property, plant, and equipment) of the business were more liquid than the business as a going entity.
Exit Strategy for Startups
Startups looking for VC investment can include an exit strategy as part of their initial pitch. It is not mandatory. Sometimes this can work when well, for example, when a startup founder is well versed in the industry and has a credible 5-year forecast.
Startup exit strategies depend on a few different factors:
How have IPOs for startups performed in the past 12-18 months? If public markets are showing enthusiasm for companies like the one being pitched, it makes it easier to show how an exit can occur.
Similar to IPOs, companies can use comparable transactions (industry or private equity sales) to show investors their route to an exit. The comparable firms should be operating in the same or close to the same competitive space.
How to Put Together a Business Exit Plan
Remember that the purpose of the plan is to make the new business owner transition as straightforward as possible.
Although the steps which follow are general, nobody knows a business better than its owner, so take whatever steps are necessary to make your business as marketable to potential buyers as possible.
These steps also assume that you, the owner of a business, have weighed up the options elsewhere. Personal finances, family situations, and other career options are beyond the scope of this article.
Rather, the intention of the points below is to ensure that a business will be ready to sell in the fastest possible time at a fair price.
Business exit plan
- Know the business
- Ensure that finances are in order
- Pay off creditors
- Remove yourself from the business
- Create a set of standard operating procedures
- Establish (and train) the management team
- Draw up a list of potential buyers
1. Know the business
This sounds obvious but a business can lose focus quickly in the aim of diversification, to the extent that it becomes ‘everything to every man.’
This may be useful in the short-term for revenue streams, but just be sure that your business has focus. It will help you find the right buyers when the time comes and to be able to communicate which part of the market your business occupies.
2. Ensure that finances are in order
This should be a priority regardless of any future business plans.
But if you intend to sell your business at short notice, it's best to have a clean, well-maintained set of financial statements going back at least three years.
3. Pay off creditors
The less debt that a business holds on its balance sheet, the more attractive it will be to potential buyers.
A common theme among small business owners in the US is thousands of dollars of credit card debt. This can be a red flag to many buyers and should be paid off as soon as possible.
4. Remove yourself from the business
How important are you to the day-to-day operations? If your business would lose more than 10% of its revenue were you to leave, the answer is “too important.”
If revenues are tied to the owner, buyers are not going to want to buy the business if the owner is going to leave right after.
Although it can be a challenge, seek to minimize your direct impact on the business, in turn making it more marketable.
5. Create a set of standard operating procedures
Closely related to the above point, ensure that your business has a set of standard operating procedures (SOPs), ideally in written form, that would allow any owner to maintain the business in working order merely by following a set of instructions.
6. Establish (and train) the management team
Are the existing managers capable of taking over the business and running it as is? If you leave the business for a vacation and one of your managers calls you several times, the answer to this question may be ‘no’.
They may need more training, or you may need a different set of managers. In either case, having a capable team in place will be valuable whether you decide to exit your business or not.
7. Draw up a list of potential buyers
A list of buyers should be made and refreshed on a reasonably regular basis. Ideally, you would know their criteria for buying a business, but this is not always practical.
Keeping a long list of buyers means that you can reach out to them at short notice if it is required at some point in the future.
This list is likely to include at least some of your managers or suppliers.
Importance of Exit Strategy
Many owners make the mistake of thinking that a business exit plan means the same thing as a ‘retirement plan’, believing that they can start thinking about putting one together as soon as they hit 55 years of age.
This is an error. Not because your departure is impending, but because it doesn’t give you the flexibility.
Instead of looking at a business exit plan as a retirement plan, rethink it as a divestment option.
An alternative way of thinking about this is, what happens to the business owner that doesn’t have an exit strategy? Think of the value destruction that occurs to the business if something unexpected happens and the owner has to make an unplanned sale, at a discount, in unattractive market circumstances, or even at a time of personal loss.
Instead of thinking about the business exit as something that will happen in the future, rethink it as something that could happen at any moment.
Exercising critical thinking to write a business exit strategy can be exciting as well as enlightening. Thinking of an exit as an end state is not the best approach since this limits businesses to a strict definition. Rather, consider how the process can be supportive of a business' growth strategy. Take these top three considerations:
- Financial considerations: If the exit strategy has a target revenue number in 5 years then how will the business get there? What financial dashboards are needed to properly run the company? How will expenses be managed so a business does not outspend against earnings?
- Supply chain considerations: What products will need to be in your catalog to maximize margins? What inventory turns ratio are you aiming for on a monthly basis?
- People considerations: Who do I hire to grow the company exponentially? What benefits do I offer to attract the best talent but don't cause complications at the exit? How do I write the force majeure so I protect the company and employees?
A business's primary goal is long-term value generation to its customers, itself, and its stakeholders. Having a thoughtful exit strategy shows the maturity of a business's Leadership towards longevity and value creation. There are many facets of the journey from owner motivation to financial strategies.
At DealRoom we help the owners of businesses of all sizes prepare for this eventuality. Our Professional Services team is ready to help businesses think through these details. It is important that an exit strategy be a journey throughout the growth stages.
Talk to us about how our tools can be an asset for you in your exit plan.
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12 Exit Planning Considerations for Private Company Business Owners
Mark G. Metzler, CPA, CGMA, CEPA
Director, Audit & Accounting
Center for Private Company Excellence Specialist
Exit planning is a crucial process for private company business owners who are looking to transition out of their businesses. It involves developing a comprehensive strategy to maximize the value of the business and ensure a smooth transition for the owner.
Here are twelve key considerations for exit planning:
- Start early : Exit planning is not a last-minute task. It requires careful preparation and implementation over an extended period. Ideally, start planning several years in advance to allow time for value enhancement and addressing any potential issues.
- Define your goals : Determine your personal and financial goals for the exit. Do you want to maximize your financial return? Are you looking for a successor who will continue your legacy? Clarifying your goals will guide your exit strategy.
- Assess business value : Conduct a thorough valuation of your business to understand its worth in the current market. This assessment will help you set realistic expectations and identify areas where you can enhance value before the exit.
- Build a strong management team : Developing a capable and independent management team is crucial for a smooth transition. Identify and groom potential successors who can lead the business effectively in your absence.
- Diversify revenue streams : Reduce economic dependency on a single customer, supplier, or market segment to make the business more attractive to potential buyers. Diversification can help mitigate risks and increase the value of your business.
- Optimize financial performance and operations : Improve profitability, streamline operations, and enhance financial reporting. Potential buyers will scrutinize these aspects, so ensure your financials are accurate and well-documented. Buyers look more favorably at a potential transaction when audited financial statements are available.
- Consider tax implications : Consult your tax professionals to understand the tax consequences of various exit strategies. The structure of the sale, whether as an asset sale or a stock sale, can have different tax consequences. Minimize both federal and state tax liabilities and explore tax-efficient options.
- Identify potential buyers : Determine the most suitable buyer for your business. It may be a competitor, a strategic investor, a private equity firm, or even a family member or employee. Research potential buyers and engage in discreet discussions, if necessary.
- Prepare documentation : Compile and organize all necessary legal and financial documents , including contracts, licenses, financial statements, tax returns, and employee agreements. Having these documents readily available will streamline the due diligence process.
- Seek professional assistance : Engage experienced professionals such as business brokers, attorneys, accountants, and financial advisors who specialize in exit planning. Their expertise will guide you through the complexities of the process to ensure a successful exit.
- Develop a succession plan : If you intend to transfer the business to a family member or an employee, create a comprehensive succession plan. Clearly define roles, responsibilities, and the transition timeline to ensure a seamless handover.
- Communicate with stakeholders : Maintain open and transparent communication with key stakeholders, including employees, customers, suppliers, and partners. This will help manage expectations, minimize surprises, and maintain business continuity during the transition.
Remember, exit planning is a highly personalized and emotional process. Consider working closely with professionals who can tailor the strategy to your specific circumstances and goals. Leverage the expertise of those who have been through the process to ensure a successful exit.
Mark G. Metzler is a Director with Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at Email .
You may also like:
- 3 Ways to Limit the Risks to Your Business of a Tightening Credit Environment
- 12 Reasons to Consider an ESOP as Your Private Company Transfer Strategy
- Don’t Underestimate the Emotional Tax of a Business Exit
What Is an Exit Plan, and Why Do I Need One?
Surveys indicate that most agency owners believe an Exit Plan is important, but still don’t have one. If that describes you, this White Paper will help you understand what an Exit Plan is and how you can fill this risky gap.
Click here for your complimentary copy: TL What Is An Exit Plan White Paper
In our 2018 National Survey on Building and Monetizing Marketing, Advertising, PR, Digital and Related Agencies , TobinLeff learned that nearly 100% of agency owners believe that an Exit Plan is an important element for their future financial security, but only 15% actually have a written Exit Plan in place. Why the big disconnect?
There can be multiple explanations for this troubling gap – expense, lack of time, not knowing where to turn to get an Exit Plan done, and so on. However, from our experience at TobinLeff, we believe that the most important explanation may be the most basic one of all: while the idea of an Exit Plan seems to make sense, most agency owners don’t really know what an Exit Plan is. They just know that it sounds like a good idea.
At the 30,000 foot level:
- An Exit Plan is clarity
- An Exit Plan is a strategic roadmap
- An Exit Plan is peace of mind
Those three things, alone, speak to how important an Exit Plan is. Now let’s get a bit more down-to-earth. When we help our clients craft Exit Plans at TobinLeff, we view it as a process of Discovery, Internal Analysis, Education, and Strategy.
The Exit Plan begins with you. After building your business, the next hardest challenge you face as an owner is how to get out of it successfully. Remember, your exit will likely be the most important transaction you will ever make with your agency. Doesn’t it seem like a little proactive planning is in order?
As I said, the Plan begins with you. What are your personal goals and priorities for your exit:
- Maximize wealth to live on in retirement?
- Generate an investment to roll into another business?
- Preserve your legacy?
- Offer staff (or family, or partners) the opportunity to follow in your footsteps?
- Restructure into a lifestyle business that you can hold onto without it holding onto you?
- Or any of countless others?
What is your timeline ? Do you want nothing more than to walk out the door tomorrow and never look back, or is an exit something over a distant horizon?
If you want to keep the agency in-house such as through a Management Buy-out, do you have the people in place to step up? This is an important question that goes well beyond technical skillsets. While you may have the most talented staff in the world, that doesn’t necessarily mean they can fill your shoes. As you well know, owning a business is vastly different from working for one. Often, even the folks who think they want to take on that challenge find their feet getting cold when faced with the harsh realities – and risks – of putting their own names and assets on the line. And, equally often, you, as their boss, aren’t in the best position to assess their suitability as owners.
What is your market position? In other words, what are your capabilities, what types of clients do you serve, what is your geographical reach… in short, what is your business model and how do you do business?
Exit Plan Discovery Phase Action Steps
1. Talk. Lots and lots of talk.
a. This is the time to gather general information. Conversation leads to clarification of goals and possible elimination of some options. Desired timelines are solidified. b. If appropriate, confidential employee interviews to assess suitability for an internal deal. The timing of this step varies based on circumstances. For owners who are concerned that having a discussion that suggests they are thinking about exiting might be destabilizing, this step would be pushed later in the process. Likewise, if an internal deal is not being considered as an option, or if an outside person needs to be brought in first to become an internal acquirer, these interviews may be delayed or foregone altogether. Whenever it occurs, these are almost always conversations better conducted by an objective, outside third party.
INTERNAL ANALYSIS PHASE
This is where you turn a hard eye inward and look at the numbers and at what is special (or maybe a little bit weak) in your own shop.
The starting question every owner has is: What is my agency worth? And the answer is, it depends.
Begin with your most recent three years of historical financials . Recast them to normalize your own compensation to a market rate, reverse any one-time out-of-the-ordinary and any personal expenses, and come up with an adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) amount. Then apply an appropriate market-driven multiplier to that number, add or subtract excess working capital, and Voila! – now you know exactly what your company is worth. Except, of course, you don’t.
Valuation (a subject for another future TobinLeff White Paper ) is as much art as it is science. The process described in the previous paragraph will result in a valuation range for a sale to a strategic buyer, but many other factors come into play in determining your agency value. For example, internal deals often are driven more by what cash flow will fund than by an underlying statement of value, and sales to financial buyers tend to be based on a forward-looking Discounted Future Cash Flow rather than a multiple of historic EBITDA. And, of course, all of these are impacted by the uniquenesses of your agency, which leads to the question of…
Value Drivers . At TobinLeff, we’ve developed a tool that assesses an agency’s distinctive characteristics over 59 criteria spread across 16 major categories. We call these Value Drivers , and they cover a range of quantitative and qualitative ratings across topics ranging from financial strength to brand to dependency on owners to client concentration risk and 12 others. Looking at these matrices or at whatever version of this tool you might develop on your own enables you to identify what attributes you will be able to leverage most effectively in any exit negotiations, and what attributes you may need to focus on enhancing.
Exit Plan Analysis Phase Action Steps
a. Gather data b. Recast and normalize financial reports c. Apply appropriate range of valuation techniques to arrive at alternate valuation estimates
2. Value Drivers
a. Assess where you fall across spectrum from Very Strong to Very Weak for 59 Value Driver criteria b. Obtain an overall agency Value Drivers Ranking to inform valuation, strategy, and future deal terms
Now that all of the groundwork has been laid, it’s time to do something with it… and this is where the Exit Plan really starts to get interesting.
This phase involves taking the information that’s been gathered and understanding the options it reveals. Where do your goals and priorities, your timeline, your staff’s interests and aptitudes, your financial performance, and your Value Drivers intersect, and what exit routes does that intersection lead to?
The first step, of course, is understanding the potential exit paths and their respective pros and cons. Not all exit strategies are practical for every agency, and no strategy is the perfect solution. The key is to understand the possibilities and then target the one(s) that make the most sense for you.
POTENTIAL EXIT STRATEGIES TO UNDERSTAND AND CONSIDER
- Sell to a strategic buyer
- Sell to a financial buyer
- Sell to a PE firm or investment group
- Structure a Management Buy-Out
- Sell to partners
- Acquire companies whose leadership can be part of an MBO
- Merge with the intention of a future sale
- Transition to family members
- Form an ESOP
- Retain control and transition management to others
Exit Plan Education Phase Action Steps
- Understand the basic structure of various exit strategies such as external sales to strategic buyers, external sales to financial buyers, management buy-outs, etc.
- Understand which exit strategies are possibilities for your agency and which are impractical choices
- Understand potential firm valuation ranges now and in the future for the feasible exit strategies
- Understand the timeline from launch to completion of feasible strategies
- Identify a Plan A exit strategy, as well as a Plan B in case Plan A runs into roadblocks
- If an internal deal is still on the table and key participant interviews have not yet been conducted, consider doing interviews now to evaluate the feasibility of an internal deal approach
Once you’ve figured out the exit path you hope to follow, it’s time to think about the best steps to maximize your chances of success and your financial return once you get to its end.
In the best case scenario, everything is already positioned perfectly for you to begin to implement your strategy on the day you’re ready to go. Unfortunately, best case scenarios are rarely real case scenarios.
The strategic section of your Exit Plan should address what you need to do to remove obstacles that prevent you from bringing your Plan to fruition, as well as what steps to take to enhance the results you will enjoy when you do.
For example, if you’re set on selling to internal management but don’t have anyone on staff who’s good at driving new business, you should build in time to hire or acquire those (or other) capabilities.
If you are determined to reach a certain multiple on your valuation but your top line revenue isn’t enough to command that number, you may need to consider buying another agency to get over the threshold.
If your senior staff is critical to your value regardless of your preferred exit strategy, it may be time to implement new retention programs such as a phantom stock plan.
These are just a few of the countless issues to consider when crafting an Exit Plan. During the Strategy Phase, you should think through these so that your management of your agency going forward is proactively structured to enhance your ultimate exit goals.
Exit Plan Strategy Phase Action Steps
1. Review the results of your financial and Value Drivers analyses for strategic planning purposes
a. Compare key financial indicators to industry benchmarks to identify operational changes necessary to build future value b. Identify weak areas in Value Drivers analysis that are most critical to strategic agency planning for strengthening future value c. Review strength areas in Value Drivers analysis to ensure they are not at risk of deterioration
2. Develop exit implementation timeline
a. Determine date by which you want to be fully exited from business b. Work backwards from full exit date to set progress dates in order to hit goal
i. Note: Keep in mind that most exit strategies take as much as one year from the start date to implement, and subsequently require your continued involvement with the agency for anywhere from one to three additional years or more
3. Begin cultivation of acquisition prospects
a. If an external sale is part of the Plan, begin now to identify your M&A advisor and to network and build a list of names of potential future acquirers
SOME FINAL THOUGHTS
Your exit is simply too important – and too difficult – to leave to chance. Like any business challenge, the more you plan for it and the more intentional and proactive you are in preparing for it, the more successful it will be. Simply knowing that you want to exit someday is not enough. You need to know how you want to exit and have a plan in place to get you there.
In summary, the key elements of an Exit Plan are:
- Your exit goals and objectives
- Exit date target
- Understanding the value of your business
- Value Drivers analysis
- Financial benchmarks analysis and valuation estimate
- Key employees interview results (optional)
- Identification of primary and secondary exit structures (e.g., Plan A and Plan B)
- Strategies for maximizing exit success
- Implementation timeline
Can you do this on your own or by working with your attorney or accountant? Yes. Is that the ideal approach? We don’t think so. Like marketing or law or accounting, exit planning is its own discipline with its own experts. It’s not enough simply to know the mechanics of putting a deal together. For you to truly maximize your results from the most important transaction of your career, it’s critical to have someone who understands your industry’s marketplace, who has implemented exits for marketing and related agencies, and who has dealt with and overcome the obstacles that are most likely to arise. For analyzing your value and potential sale multiples, knowing how you compare to industry performance benchmarks, understanding what type of buyer would find you interesting and who wouldn’t, etc., it’s beyond helpful to have an advisor who deals with these types of questions every day.
However you decide to develop your Exit Plan, the time to begin is now. As mentioned above, the exit process can take as long as 4-6 years once you decide to move forward. The sooner you begin to plan for that process, the more likely it is that you will be pleased with the results.
If you are part of the 85% of agency owners that our Survey showed believe in an Exit Plan but don’t yet have one, contact us today. You can give us a call at 412/515-0120, ext. 102, or email me at [email protected] to talk about how we can help you find clarity, craft a strategic roadmap, and enjoy peace of mind when you’re thinking about your post-exit future.
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What is an exit plan.
An exit plan is a comprehensive road map that addresses all of the business, personal, financial, legal, tax and value creation issues involved in transitioning a privately owned business. A comprehensive exit plan provides business owners with a clear strategy to help them exit their business, when and how they choose, to maximize their personal and business objectives.
Your exit plan should be focused on three main objectives: 1) maximizing your company’s value prior to your exit, 2) ensure you are personally and financially prepared to exit your business, and 3) plan for the third act of your life.
Most business plans speak to what a business needs to do to be successful. But the plans often leave out a definition of the end game and rarely incorporate personal objectives. Exit planning is a process, not an event. It should be approached as a way of business.
To be effective, your exit plan must include these six essential components:
- A concise statement of your business goals, personal goals and family/estate goals
- A detailed business valuation to establish a baseline value for the business
- A plan to help you identify specific ways to enhance the value of the business prior to your exit
- An analysis of the pros and cons of your different exit alternatives, such as a third-party sale, management buyout, family succession, or liquidation
- Suggestions to minimize any capital gains, ordinary income and estate taxes related to the exit
- An action plan that details the specific personal and business steps you must take in order to prepare for your exit
Exit planning is a great contingency tool—while no one likes to think about unfortunate life occurrences, a good exit plan includes contingencies for illness, burnout, divorce and even death. Without a well-thought-out survival plan, there could be very serious consequences to the owner’s family, employees and customers. A contingency plan shows the owner’s heirs and advisors what the owner would like them to do with the business should something unfortunate occur. Without continuity in leadership, the business most likely will fail.
Even if your business is in a high growth mode and you have no thoughts of retirement, you still need to deal with the contingencies of a forced exit. Having a plan in place will bring a sense of security to your family, employees and colleagues.
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Small Business Exit Strategies: A Brief Rundown of Your Way Out
When you first start a business, the last thing you’re thinking about is leaving it. But, life gets in the way of plans. That’s why you need an exit strategy before starting your small business. Exit strategies help make sure you, your business, and investors are protected.
There are a number of exit strategies for small business you might consider. The path you choose depends on a unique set of circumstances, like business size.
What is a company exit strategy?
An exit strategy, or plan, outlines how a business owner plans on selling their investment in their business. Exit strategies help business owners have an out if they want to sell or close the business. Entrepreneurs must create a business exit plan before starting a business and tweak it as the business grows and the market changes.
So, where does your strategy go? Include your exit strategy in the financial section of business plan .
You especially need a strong exit strategy if you plan on seeking small business financing . Investors and lenders want to know that their money is protected if your business fails.
If nothing else, the central question your business’s exit plan needs to answer is:
- How will you protect business investments and limit losses?
Small business exit strategies
Whether you’re writing your business plan for the first time or updating it, take a look at these types of exit strategies. Remember to weigh the pros and cons of each to determine if it’s feasible.
In a merger, two businesses combine into one. Mergers increase your business’s value, which is why investors tend to like them.
To go through with a merger, you still need to be a part of the business. Through a merger, you will be an owner or manager of the new business. Your employees might be employed by the new merged business. But if you want to sever your ties with your business, a merger is not the best exit strategy for you.
There are five main types of mergers:
- Horizontal: Both businesses are in the same industry
- Vertical: Both businesses that are part of the same supply chain
- Conglomerate: The two businesses have nothing in common
- Market extension: The businesses sell the same products but compete in different markets
- Product extension: Both businesses’ products go well together
Before you merge businesses, make sure that the new business is a good fit with your current one. You could end up losing revenue otherwise.
An acquisition is when a company buys another business. With an acquisition exit strategy, you give up ownership of your business to the company that buys it from you.
One of the positives of going with an acquisition is that you get to name your price. A business might be apt to pay a higher price than the actual value of your business, especially if they’re a competitor.
But if you’re not ready to let go of your business, an acquisition might not be the right exit strategy for you. You may need to sign a noncompete agreement promising not to work for or start a new business similar to the one you just sold.
There are two types of acquisition: friendly and hostile. If you have a friendly acquisition, you agree to be acquired by a larger business. However, a hostile acquisition means that you do not agree. The acquiring business purchases stakes to complete the acquisition.
If an acquisition is your exit strategy, your acquisition should be friendly. You likely will attempt to find an acquiring business that you want to sell to.
3. Sell to someone you know
You may want to see your business live on under someone else’s ownership. In many cases, you can sell to someone you know as an exit strategy.
Take a look at some of the people you could sell your business to:
- Family member (e.g., child)
- Business colleague
Before selling your business to someone you know or are acquainted with, consider the drawbacks. You don’t want to jeopardize personal relationships over your business. Disclose things like liabilities and the profitability of your business before a family, friend, or acquaintance buys it from you.
4. Initial public offering
An initial public offering , or IPO, is the first sale of a business’s stocks to the public. This is also known as “going public.”
Unlike a private business, a public business gives up part of their ownership to stockholders from the general public. Public businesses tend to be larger. They also (generally) go through a high-growth period. By taking your business public, you can secure more funds to help pay off debt.
However, going public might be difficult for small businesses because it costs a significant amount of time and money. If you want a fast exit strategy, an IPO might not be the way to go.
To start an IPO, you need to find an investment bank, collect financial information, register with the Securities and Exchange Commission (SEC), and come up with a stock price.
Another exit strategy for small business is liquidation. With liquidation, business operations end and your assets are sold. The liquidation value of your assets go to creditors and investors. However, your creditors—not your investors—get first dibs.
Liquidation is a clear-cut exit strategy because you don’t need to negotiate or merge your business. Your business stops and your assets go to the people you owe money to.
If you liquidate your business, however, you lose your business concept, reputation, and your customers. Your business will not live on like in other exit strategy options.
How to write an exit strategy business plan
Again, you must include your exit strategy at the end of your business plan. That way, you can reference it if your business starts going south. And, potential investors can determine if you have a strong plan in place to protect their money if you leave.
When coming up with your exit strategy, consider the following factors:
- Your business structure
- Your business size
- The economy
- Entrepreneurial family members or friends
Here is an exit strategy example you might include in your business plan:
- Our preferred exit strategy is to merge with another local small business. The business plan supports the possibility of a merge. We believe a product extension merger would be our target exit strategy, but we are also open to a horizontal merger.
Keep in mind that you will update your business plan and exit strategy as your company goals change.
For example, your original exit plan may have been to merge with another business. But after 25 years of owning your business, your daughter says she wants to buy it from you. If you decide to sell instead of merge, update your business plan to reflect your new exit strategy.
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This article has been updated from its original publication date of December 27, 2016.
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What is Exit Business Planning? How To Develop an Exit Plan For a Small Business
Business Exit Planning is part of every successful business plan. Exit planning guides you on how you can leave your business. You do not want to bear the loss when you close your business.
It answers the question of what you will do after ending your business operations.
It helps you make a graceful exit without risking your investment. Strong exit planning will help you to convince investors that their investment is in safe hands.
No matter if you are running a successful business or handling failure, an exit plan will be part of your business strategy.
Want to learn more about exit planning? keep reading.
This guide will clarify everything from smart exit strategies to how to develop an exit plan.
Make Your Business Exit Smooth and Rewarding
Use WiseBusinessPlans Business Exit Strategy Cosultation and get the most out of exiting business.
What Is Business Exit Planning?
” An exit planning allows an entrepreneur to sell his business to maximize the value of Company “
An exit strategy differs from business to business. It depends on the size of the company or what type of involvement you want in your business.
If an entrepreneur wants to sell a 100% share of his company, an exit planning strategy should remove all his involvement from the company.
If you have a company that is not making a profit; It is suggested to make an exit plan to get rid of the business. The exit plan for the non-profitable company should try to minimize loss.
If your company is generating good profit, an exit plan should maximize the profit.
A good exit plan gives maximum value to the entrepreneur when he sells his company.
Importance of Having an Exit Plan
Are you still unclear about why you should have an exit plan? Go through these points for having a clear idea about the importance of exit planning.
- An exit plan allows investors to be on the safe side when unexpected circumstances seize them.
- Changes in the market and economy can be a reason for selling a company. However, selling your company needs preparation. A strong exit plan will make you prepared for that time.
- You might not have started your company for selling, but if you receive an attractive offer from a potential buyer, this could be a topic of discussion. You are making a good profit and know the value of your company. At that point, an exit plan helps you decide whether you should sell your company or not.
- Illness and bad health can push you to get out of the business. Having an exit plan will prepare you for that time.
- An exit plan will urge you to focus on your targeted goal. It helps you end your business operations at the right time. You can work on your exit plan along with the business plan. An exit plan assists you to make a graceful exit from your business. Exit planning helps you to understand the value of your assets.
- You do not want to be on the losing side when you shut down a company. It is recommended to make your exit planning clear at the beginning of the business.
7 Smart Business Exit Strategies
There is no right or wrong exit plan. Whenever you are ready for an exit, choose the strategy that will work for you.
There are many factors that you must take into consideration when choosing a strategy. Such as :
- Time: what is the right time to sell your business?
- Money: How much money do you need to fulfill your financial needs?
- Business involvement: how much business involvement do you need after an exit?
These three factors will help you choose an exit strategy smartly.
Let’s discuss the smart strategies to exit your business.
- Mergers & acquisition
- Initial Public Offering
- Management buyout
- Sell to someone you know
Merger & acquisition (m&a).
- A merger means when two companies consolidate and become one. Ex: Exxon & Mobil
- The acquisition means when a company purchases another company. Ex: Google & Android
Merger & Acquisition is referred to as M&A. The process of merger & Acquisition is different.
In a merger, two companies join hands for better benefits and rapid growth. All their resources, brand name, tax, liabilities everything become one. In a merger, money is not exchanged from both sides.
The acquisition is different from merging. In acquisition, a company purchases another company. Ownership will be changed. Everything will be transferred to the new owner. In acquisition, money is exchanged. A company can purchase a portion of the share or the whole company.
M&A benefits both companies. You can merge or sell your company to another big company.
Larger companies often hunt small companies to be purchased. They want to eliminate the competition and increase their geographic footprint.
In the digital world, Google and Android merged for better benefits. Google was a large IT company. However, Android was a start-up and struggling to make a name in the market.
Android was taken by Google for $50 million. After the acquisition, Android made a noticeable share in the mobile phone market.
- More room for business price negotiation
- You can set your own terms
- If there is significant demand for your business, you can increase the price and get a better deal
- A time-consuming process with a lot of corporate politics involved
- Costly with hefty attorney fees
- You may not get merged or acquired in the first run
Merger And Acquisition M&A Business Plan
When it comes to M&A transactions, leaving the details to Wisebusinessplans can save you time, money, and effort. To reach your business goals, our consultants can write a business plan for you. A well-prepared M&A Business Plan will allow you to get back to work quickly.
Initial Public Offering (IPO)
IPO is an exit strategy that allows companies, and private Investors in companies sell their Share to public Ex Alibaba IPO raised $21.8 billion on Sep 2014
Private investors hold equity in companies. They can sell their private equity (PE) to the public when they need cash.
Companies also use this strategy to raise funds. Take Alibaba for example. Since its IPO in 2014, they have significantly increased its products and services portfolio and its revenue has increased
- IPO can be very lucrative in the right settings
- Intense, ongoing scrutiny from shareholders and regulators Strict reporting for the company performance is necessary
Exit Business Strategies to Get You What You Want
Use WiseBusinessPlans Business Exit Strategy Cosultation and get the most out of exiting business.
A management buyout is referred to as MBO. In this strategy, the current management of the company can purchase a portion of the shares or the whole company if they can pool the resources.
This exit method benefits both seller and buyer. MBO selling process can be done quickly as the management team is already familiar with the business and its potential.
The current management will assume more senior roles in the new company.
As they are already running the company, an MBO will increase their loyalty towards the company and you may also be able to retain a position like an advisor, etc.
- You will have the peace of mind that your business is in good hands
- MBO is generally a smooth process
- You can still keep working in the company as an advisor
- Management may not be interested in buying the company or they may not have the resources Big management changes will produce short-term problems
Selling to a Partner or Investor
You can sell your stakes in the company to your business partner or an investor. However, this applies to you when you are not a sole proprietor.
The partner or investor buying your share is called ‘friendly buyer’. Mostly, this person is from your circle of friends or family or someone you trust.
- Smooth transition, no visible changes in company operations or revenues
- Not as lucrative as other exit business strategies
Liquidation means closing your business by selling all your assets to get cash.
Business Liquidation is often considered a quick strategy to get out of business. If your business is going well, you can sell off your assets at a good price and can maintain cash flow.
Liquidation is a clear-cut strategy to end your business journey. However, if you have creditors, the money will go to pay off the debt first before you pocket anything.
Before liquidation, make sure to do these things for a smooth transition.
- Make payments to the employees.
- Clear your taxes, and keep a record of them in case you need them in the future.
- End all your business expenses such as registrations and licenses.
- File the business abolition document.
- A liquidation ends your business in toto.
- Liquidation is a faster way to exit your business.
- You may not get the right price for your business
- Creates bad rapport for you in the business community overall
Acquihire is when someone buys your company with the sole purpose to acquire your team.
An acquihire benefits skilled employees of your company as it provides them with growth opportunities and you can be sure that they will be taken care of.
- You can get a higher price for your business from an interested party
- Company employees get the opportunity for long-term growth
- Not many team buyers in the market
- Costly process
Filing for bankruptcy is your last resort in exiting your business. A bankruptcy is filed when you cannot pay your debts or liabilities and the court sells your business assets and give creditors pennies for a dollar.
Bankruptcy comes with bad consequences for your credit report. It might become hard for you to start a new business after bankruptcy unless you are Donald Trump.
Settles your debts and liabilities
Makes it hard for you to get credit in the future
How to Develop an Exit Plan?
A good exit plan provides you maximum value when you sell your company. Before starting to develop, you need to ask a few questions to yourself.
- Do you want involvement in your business?
- What are your financial goals?
- Do you have to pay the creditors or investors back?
These three questions will clarify things. Answering these questions will help you find the right exit strategies for your business.
If you do not want any involvement in the business, all shares could be sold. You can liquidate the company, and remove your involvement.
Objectives of your Exit Business Strategy
To get maximum value for a company, you should set your exit business strategy objectives.
These objectives will help you understand your requirements. You want maximum return on investment, and knowing your goals will support you to sell your company for a good profit.
Make Business Finance Report
Prepare your finance report for a better understanding of your company’s account and assets.
A clear finance report will enable you to understand your business performance and value. Having a clear idea of finances will help in negotiations with buyers.
As you are going to sell your business, it is recommended to have clear finances. Pay off the creditors if you have any. Less debt will attract more buyers.
The market situation should be taken into consideration while making an exit plan. If the market condition is good, there must be a lot of potential buyers and you can sell your company at a higher rate.
Adopt the Right Strategy and Timeline
There are many strategies to adopt, you need to choose the one that will work for you. Select the time when you are prepared for the transition.
If you do not want to sell a 100% share of the company, it is advised to adopt an IPO strategy. Through this strategy, you can stay connected with your business. IPO helps you to sell a portion of your shares.
Likewise, choose a time when you are prepared to sell your company.
Business evaluation is another crucial step. Business evaluation gives you an idea about the value of your business. After making the finance report, you can easily examine your company.
You can not put your business for sale without a proper idea about the value.
Bonus Tip : Know the worth of your small business by using our business evaluation calculator .
Speak with your Investors
Once you are clear on what you want to do with your business, take your investors and stakeholders in confidence.
Tell them how the investors’ share will be repaid. You’ll need your business finance report to convince investors of your claims.
Choose new Leadership
Starting with choosing new leadership for your business as you continue with the exit business plan.
You can transfer responsibilities to new leadership smoothly if your business operations are already documented.
Tell your Employees
Your employees have an emotional attachment to the company. Tell them about your business exit plan. Face them with empathy and be transparent in your answers. This will make them feel valued and increase their loyalty to the business.
Inform your Customers
Announce the changes in your business to your customers. Introduce them to the new business owners to keep their confidence.
In case of liquidation or bankruptcy, educate your customers about alternative businesses that offer the same or similar products or services as you did.
What Is the Best Exit Plan?
The best exit plan is the one that gives you maximum profit. A plan that is according to your expectations and goal is best for your business.
The best strategy is the one that keeps on updating as per your need.
In the beginning, you may want to merge your company with another corporation for better results. Later on, one of your close relatives wants to buy your company. His offer might be tempting. You change your mind and are ready to sell.
The best plan is always an updated plan. You can make their exit plans themselves according to their goals. Consult a professional if you feel stuck in the process.
Still Not Sure? Get Professional Help with Exit Business Planning
Contact WiseBusinessPlans Business Exit Strategy Cosultation and make a graceful business exit.
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I exited from my first business and didn’t know these strategies before. I suffered from huge financial damage. As I know now, I will definitely keep all this in my mind.
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What Is an Exit Strategy?
Understanding exit strategies, who needs an exit plan, why is it important to have an exit plan, exit strategies for startups, exit strategies for established businesses, exit strategies for investors, why is it important to have an exit plan, what are common exit strategies used by startups, what are common exit strategies used by established companies, what exit strategies can investors use, the bottom line.
Exit Strategy Definition for an Investment or Business
Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.
Gordon Scott has been an active investor and technical analyst or 20+ years. He is a Chartered Market Technician (CMT).
An exit strategy is a contingency plan executed by an investor , venture capitalist , or business owner to liquidate a position in a financial asset or dispose of tangible business assets once predetermined criteria have been met or exceeded.
An exit strategy may be executed to exit a nonperforming investment or close an unprofitable business. In this case, the purpose of the exit strategy is to limit losses.
An exit strategy may also be executed when an investment or business venture has met its profit objective. For instance, an angel investor in a startup company may plan an exit strategy through an initial public offering (IPO) .
Other reasons for executing an exit strategy may include a significant change in market conditions due to a catastrophic event; legal reasons, such as estate planning , liability lawsuits, or a divorce; or even because the business owner/investor is retiring and wants to cash out.
- An exit strategy is a conscious plan to dispose of an investment in a business venture or financial asset.
- An exit strategy helps to minimize losses and maximize profits on investments.
- Startup exit strategies include initial public offerings (IPOs), acquisitions, or buyouts but may also include liquidation or bankruptcy to exit a failing company.
- Established business exit plans include mergers and acquisitions as well as liquidation and bankruptcy for insolvent companies.
- Exit strategies for investors include the 1% rule, a percentage-based exit, a time-based exit, or selling a stake in a business.
An effective exit strategy should be planned for every positive and negative contingency regardless of the investment type or business venture. This planning should be integral to determining the risk associated with the investment or business venture.
An exit strategy is a business owner’s strategic plan to sell ownership in a company to investors or another company. It outlines a process to reduce or liquidate ownership in a business and, if the business is successful, make a substantial profit.
If the business is not successful, an exit strategy (or exit plan) enables the owner to limit losses. An exit strategy may also be used by an investor, such as a venture capitalist, to prepare for a cash-out of an investment.
For investors, exit strategies and other money management techniques can greatly help remove emotion and reduce risk . Before entering an investment, investors should set a point at which they will sell for a loss and a point at which they will sell for a gain.
Business owners of both small and large companies need to create and maintain plans to control what happens to their business when they want to exit. An entrepreneur of a startup may exit their business through an IPO, a strategic acquisition, or a management buyout, while the CEO of a larger company may turn to mergers and acquisitions as an exit strategy.
Investors, such as venture capitalists or angel investors, need an exit plan to reduce or eliminate exposure to underperforming investments so they can capitalize on other opportunities. A well-thought-out exit strategy also provides guidance on when to book profits on unrealized gains.
Businesses and investors should have a clearly defined exit plan to minimize potential losses and maximize profits on their investments. Here are several specific reasons why it’s important to have an exit plan.
Removes emotions : An exit plan removes emotions from the decision-making process. Having a predetermined level at which to exit an investment or sell a business helps avoid panic selling or making rushed decisions when emotions are high, which could accentuate a loss or not fully realize a profit.
Goal setting : Having an exit plan with specific goals helps answer important questions and guides future strategic decision making. For example, a startup’s exit plan might include a future buyout price that it would accept based on revenue turnover. That figure would help make strategic decisions about how big to grow the company to reach predetermined sales targets.
Unexpected events : Unexpected events are a part of life. Therefore, it’s essential to have an exit strategy for what happens when things don’t go to plan. For instance, what happens to a business if the owner faces an unexpected illness? What happens if the company loses a key supplier or customer? These situations need planning in advance to minimize potential losses and capitalize on gains.
Succession planning : An exit plan specifies what happens to the business when key personnel leave. For example, an exit strategy might stipulate through a succession plan that the company passes to another family member or that the business sells a stake to other owners or founders. Carefully detailed succession planning of an exit strategy can help avoid potential conflict when a business owner wants to or has to depart.
In the case of a startup business, successful entrepreneurs plan for a comprehensive exit strategy to prepare for business operations not meeting predetermined milestones.
If cash flow draws down to a point where business operations are no longer sustainable, and an external capital infusion is no longer feasible to maintain operations, then a planned termination of operations and a liquidation of all assets are sometimes the best options to limit further losses.
Most venture capitalists insist that a carefully planned exit strategy be included in a business plan before committing any capital. Business owners or investors may also choose to exit if a lucrative offer for the business is tendered by another party.
Ideally, an entrepreneur will develop an exit strategy in their initial business plan before launching the business. The choice of exit plan will influence business development decisions. Common types of exit strategies include IPOs, strategic acquisitions , and management buyouts (MBOs).
The exit strategy that an entrepreneur chooses depends on many factors, such as how much control or involvement they want to retain in the business, whether they want the company to continue being operated in the same way, or if they are willing to see it change going forward. The entrepreneur will want to be paid a fair price for their ownership share.
A strategic acquisition, for example, will relieve the founder of their ownership responsibilities but will also mean giving up control. IPOs are often considered the ultimate exit strategy since they are associated with prestige and high payoffs. Contrastingly, bankruptcy is seen as the least desirable way to exit a startup.
A key aspect of an exit strategy is business valuation , and there are specialists who can help business owners (and buyers) examine a company’s financial statements to determine a fair value. There are also transition managers whose role is to assist sellers with their business exit strategies.
In the case of an established business, successful CEOs develop a comprehensive exit strategy as part of their contingency planning for the company.
Larger businesses often favor a merger or acquisition as an exit strategy, as it can be a lucrative way to remunerate owners and/or shareholders. Rival companies often pay a premium to buy out a company that allows them to increase market share , acquire intellectual property, or eliminate competition. This raises the prospects of other rivals also placing a bid for the company, ultimately rewarding the sellers of the business.
However, a merger-and-acquisition-focused exit strategy should factor in the time and costs to organize large deals as well as regulatory considerations, such as antitrust laws .
Established companies also plan for how to exit a failing business, which usually involves liquidation or bankruptcy. Liquidation consists of closing down the business and selling off all its assets , with any leftover cash going toward paying off debts and distributing among shareholders .
As mentioned above, most businesses see bankruptcy as a last-resort exit; however, it sometimes becomes the only viable option. Under this scenario, a company’s assets are seized, and it receives relief from its debts. However, declaring bankruptcy could prevent business owners from borrowing credit or starting another company in the future.
Investors can use several different exit strategies to prudently manage their investments. Below, we look at several strategies that help minimize losses and maximize gains.
Selling equity stake : Investors with shares in a startup or small company could exit by selling their equity stake in the business to other investors or a family member. Selling an equity stake may form part of a succession plan agreed upon by founders when starting a business. If selling a startup stake to a family member, it’s important that they understand any conditions tied to the investment.
The 1% rule : Investors apply this rule by exiting an investment if the maximum loss equals 1% of their liquid net worth . For example, if Olivia has a liquid net worth of $2 million, she would cut an investment if it generates a loss of $20,000 ((1 ÷ 100) × 2,000,000). The 1% rule helps investors take a systematic approach to protect their capital.
Percentage exit : Using this strategy, investors exit an investment when it has gained or fallen by a certain percentage from its purchase price. For instance, Ethan, an angel investor, may decide to sell his share in a startup if it achieves a 300% return on investment (ROI) . Conversely, Amelia, a venture capitalist, may decide to sell her share in a startup if it drops 20% in value.
Time-based exit : Investors apply this strategy by exiting their investment after a specific amount of time has passed. For example, Noah may decide to sell his stake in a business after 18 months if it has not generated a positive return. A time-based exit helps free up capital from underperforming investments that could be used for other opportunities.
Businesses should have a clearly defined exit plan to help manage risk and capitalize on opportunities. Specifically, an exit plan helps remove emotion from decision making, assists with strategic direction, helps to plan for unexpected events, and provides details about an actionable succession plan.
Exit strategies used by early-stage companies include initial public offerings (IPOs), strategic acquisitions, and management buyouts (MBOs). Entrepreneurs typically select an exit plan before launching a business that fits their longer-term business development decisions and goals. The exit strategy that an entrepreneur chooses depends on factors such as how much involvement they want to retain in the business and its future long-term potential.
More established companies favor mergers and acquisitions as an exit strategy because it often leads to a favorable deal for shareholders, particularly if a rival company wants to increase its market share or acquire intellectual property. Larger companies may exit a loss-making business by liquidating their assets or declaring bankruptcy.
Investors can capitalize on gains and reduce risk by using exit strategies such as the 1% rule, a percentage-based exit, a time-based exit, or selling their equity stake in a business to other investors or family members. Investors typically set an exit strategy before entering into an investment, as it helps to manage emotions and determine if there is a favorable risk-return tradeoff .
Exit strategy refers to how a business owner or investor will liquidate an asset once predetermined conditions have been met. An exit plan helps to minimize potential losses and maximize profits by keeping emotions in check and setting quantifiable goals.
Common exit strategies for startups include IPOs, strategic acquisitions, and MBOs. More established companies often favor a merger or acquisition as an exit strategy but may also choose to go into liquidation or file for bankruptcy if becoming insolvent . Meanwhile, investors can exit investments using strategies such as the 1% rule, a percentage-based exit, a time-based exit, or selling their equity stake in a business.
Selling My Business. “ The Importance of Having an Exit Plan .”
AllBusiness.com, via Internet Archive. “ 10 Reasons Why Your Exit Strategy Is as Important as Your Business Plan .”
Ansarada. “ Different Business Exit Strategies, Their Pros and Cons .”
Experian. “ What Is an Exit Strategy for Investing? ”
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- Building Your Business
- Becoming an Owner
- Business Plans
How to Create an Exit Strategy for Your Small Business
And Why Your Business Needs One
Why Small Businesses Need Exit Strategies
Liquidation, sell the business to someone you know, sell the business in the open market.
- Sell to Another Business
An IPO (Initial Public Offering)
Choosing an exit strategy for your business might not seem like an obvious step when you’re just getting started, however planning ahead is an important part of building a business. An exit strategy is a plan for how you will eventually leave the business. It also includes details on what will happen to the enterprise after you have left.
We’ll explain the value of having a plan in place , discuss your options for exiting the business, and weigh the benefits and drawbacks of each scenario.
All businesses need an exit strategy at some point, even if that just means transferring ownership of the company when one owner decides to retire. Leaving a business can be stressful, and emotions can often cloud your judgment. Should this occur, a good exit strategy that you’ve come up with in advance will enable you to address tough situations rationally.
Here are some things to consider when making your exit strategy:
- The length of time you plan on being part of the business
- Your financial situation and expectations
- Any investors or creditors who need to be compensated, and what that process will look like
Having an exit strategy in place early on can help you to make decisions that will support your eventual exit. This allows the process to be as easy and profitable as possible.
You’ll want to revisit your exit strategy often to see if it still fits your situation and goals. Then, you can make adjustments as necessary.
Learn five common exit strategies for small businesses.
Liquidation is the process of closing a business and selling off its assets or redistributing them to creditors and shareholders. There are two main ways to do this.
Close and Sell Assets as Soon as Possible
One option is to close the business and sell the assets as soon as you can. This is often a last resort method for a business, as you only make money off the assets you can sell, while valuable items like client lists or business relationships are lost.
Before liquidating a business, you’ll want to work with liquidation experts to make sure you’re following the right procedure for selling your assets, paying back all debts, employee protocol, and finalizing all legal and financial commitments.
- Relatively simple exit
- Depending on the sale of assets, it can be a quick closing process
- You only make money on the assets you’re able to sell (real estate, inventory, equipment, etc.)
- If there are creditors, they must be paid first from any money generated
Liquidating Your Business over Time
The other common liquidation option is paying yourself until your business finances run dry, then you ultimately close the business. This is often referred to as a “lifestyle business.” The owner takes the funds out over time instead of reinvesting them back into the business.
- You have cash flow to maintain your lifestyle
- The business’s growth potential and sale value are stunted
- If there are other investors who aren’t being benefitted, they will likely be upset with the situation
- How you withdraw the funds will affect your tax situation
You may decide to sell the business to someone whom you’re familiar with, whether that’s an existing partner, a manager or employee, a customer, a friend, or a family member.
Commonly, during a seller financing agreement, the buyer is able to pay off the business gradually. This allows the seller to maintain an income while the buyer begins to run the business without making a large initial investment. The seller can also act as a mentor during the transition, which helps to make the process smoother for everyone.
Be aware that valuation, business transfer, and estate planning issues can be complex when selling to a family member. You’ll want to involve attorneys, accountants, and family successors when planning the transition.
- A long-term buyout could help incentivize employees, making them feel more committed to the business’ success
- If sold to someone who’s already familiar with the company, there may be less disruption to the business
- You may be able to remain involved in the business if you want to
- Could stress family relations and cause disagreements among the family
- You may be tempted to sell at a discounted price, which means you won’t recoup the full amount the business is worth
Buying an already established business can be an attractive option for entrepreneurs. This is because it’s less risky than starting a new enterprise, and seller financing makes the purchase easier to fund than it would be if you were financing a startup. Buyers also benefit from assuming a business’ existing systems, its sales stream and cash flow, established client base, and brand reputation.
For these reasons, it’s best to put in the effort to prepare your business in advance and make it as appealing as possible to attract potential buyers. The U.S. Small Business Administration can also be an asset, as it provides helpful information regarding closing or selling your business.
- If your business is in good financial condition, it will likely be attractive to buyers
- The business’ goodwill can be incorporated into the company’s value, enabling the seller to profit from years of relationship and brand building
- It can be a long, tedious process to find a buyer for your business in the open market
- Valuing a business can be complicated, and you might not receive the selling price you want
Sell to Another Business
In some cases, a competitor or similar business may want to acquire your company. Your business could be a strategic fit for their enterprise or a competitor may want to eliminate the competition. This is a good option for someone who wants to continue work in their chosen industry but with less responsibility.
Generally during acquisitions, the business owner is offered a position with the new company. If this is the case, make sure you’re comfortable with the role and fully understand the dynamics and culture of the new workplace. You’ll want to work with an attorney when structuring the acquisition agreement.
- The purchasing business may be willing to pay a high price for your company
- The cultures and systems of the two businesses might clash
- Some or many of your employees may be laid off during the transition
An initial public offering usually refers to when a business first sells its shares of stock to the public. Companies typically go through this process to raise additional capital. Going public is a big step for any business—it’s a long, expensive process, and afterward the company is subject to public reporting requirements.
- It can be very profitable to become a public company
- Going public can help boost publicity, reputation, and brand awareness
- Taking your company public is a tedious, lengthy, and expensive endeavor
- Going public comes with new obligations like filing SEC reports and providing information about business operations, finances, and management
- Shareholders get to have a say over the company’s direction, which could cause you to lose some flexibility in managing the business
U.S. Chamber of Commerce. " Ready to Move On? How to Create an Exit Plan for Your Business ." Accessed May 10, 2021.
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Mentioned in How a Mid-Year Review Can Help You Achieve Your Goals Promote Yourself to CEO | Small Business Strategy for Women Entrepreneurs
“What questions do I ask myself in a review? What do I do when I sit down to check my progress? How do I adjust my plan?” We’re almost at the midway point of the year which is the perfect time to do a review of your business. But not everybody knows where to start when it comes to doing a review, and these are the types of questions I get when working with clients. What if you’re not sure if you’re on track with your goals? Don’t worry! With my framework, you can figure out whether or not you’re still on pace to meet your goals for the year. In this episode of the Promote Yourself to CEO podcast, I walk you through a mid-year review. You’ll learn the questions you need to ask yourself to help you determine what is and isn’t working in your business and how you can start planning for the second half of the year. On this episode of Promote Yourself to CEO: 5:00 - Look at each goal you set at the start of the year and ask yourself these questions. I discuss a couple of mine. 10:39 - What goal am I not currently on track to reach? Here’s one I’ve been struggling with lately. 14:42 - The next step in the mid-year review process involves digging a little deeper with a month-by-month review. Answer these key questions. 25:22 - What has worked so far this year? (And what has flopped? I reveal why something going wrong isn’t always because you did something wrong). 33:28 - Your leading and lagging metrics are two of the most important things in your business to wrap your head around. 36:10 - Is there a gap in your revenue at this mid-way point? If so, here’s what you can do. 38:17 - Plan for the rest of the year with these four questions to ask about each month remaining. 44:22 - So many entrepreneurs struggle because they overcomplicate this! To wrap up, I offer this one final piece of insight. Mentioned in How a Mid-Year Review Can Help You Achieve Your Goals Mid-Year Review WorkbookThe CEO CollectiveThe CEO Retreat90-Day CEO Operating SystemThe CEO PlannerPlan Your Best Year Ever ChallengeRacheal on Instagram and TikTokRate and review on Apple Podcasts
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- © 2023 Promote Yourself to CEO | Small Business Strategy for Women Entrepreneurs
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