The last chapter of your business plan should be your exit strategy
There is an amazing statistic that states nearly 80% of all business owners in the U.S. do not have an exit strategy!
What’s a business exit strategy? It’s a well-thought-out plan that maps out the steps taken when you want to leave your business and for maximum value. The plan will describe and outline the form and direction that transition will take. You have more than likely written a business plan to direct your business through the cycle of its life. It makes sense you have a plan to guide you to the finish line or the conclusion.
Planning to exit your business takes time and it takes years to implement properly. If you are to maximize the value of your business, planning needs to be done way before you anticipate exiting. The more you plan, the longer you plan, the better positioned you will be to control the outcome. Leaving your business on your terms — that’s the goal.
OK, how do you get started? Much of what you do will be unique to your business, so there are a number of questions you will want to ask yourself and get your exit plan started.
How much longer do you want to operate the business? Where would you expect yourself to be at the end of that period? Would you want to be involved in the business as an employee with the new owner? As time goes forward it may be a good idea to revisit these questions from year to year as all things evolve.
What if something unexpected happens to you? You would want your family and your business to be protected. It’s important to take steps to secure the business so it can operate uninterrupted and continue without you. How do you do that? Make sure key employees have the skills and responsibility to manage the business, if you can’t. Make sure your company is well capitalized.
Financial goals are important and different for everyone. Regardless of how well your business is doing, nearly everyone has financial commitments and goals interacting with their business plans. Surprisingly, nearly 70% of self-employed individuals do not save enough for retirement.
Wherever you are in achieving those goals begs the question as to how it plays into your exit strategy.
Formulating a comprehensive plan necessitates a deep understanding of your business’s life cycle. Along with it are employees, valuation, cashflow, insurance, tax, legal and family decisions — not to mention your legacy.
What is needed is to work with a team who has a broad understanding of all these factors, as well as the experience. Your team will be a group of advisors specific to all these areas who align themselves to guide you to one integrated plan.
Engaging an exit planning advisor with strong experience in all these areas brings the professionals together as a formidable advisory team. It’s this advisor’s responsibility to coordinate all the professionals necessary to achieve your goals.
A few exit strategy options:
- You’re a third generation business and want to keep it in the family. It’s important to make plans for transferring the business to a child or another relative(s) at some point. This is an attractive route because that person(s) can be groomed as the heir apparent overtime. It’s very important the family can handle the potential emotion and stress that comes with a business transfer of this nature. It’s important to choose the best person for that role.
- Become acquired by or merge with a related business that has similar and synergistic goals. This is where it’s critical that your exit strategy team can be extremely helpful in getting you the maximum value and the best terms and conditions for the transfer of your business. In this scenario you may have flexibility with your interest in the new company, whether it’s staying on in a new capacity — jobwise and/or as a minority equity owner — payouts over several years, or cash at close and you walk away.
- A management buyout is not uncommon. This can be effective in that you may have people in place that have been with the company for a long time and they know the business inside and out. Maybe they already operate the business for you and probably know how to manage the employees and customers. This strategy could be very smooth with minor disruptions in the transition and continue the legacy of your business.
Because they know you so well, they may be very flexible with terms and conditions and your continued involvement if you choose to do so. Be the mentor.
- Lastly, if you are co-owner or partial owner, you could sell off your piece of the business to the other partner(s) or another interested party. The advantages are the business remains relatively unaffected and business should function as before, you can exit and hopefully profitably, plus you’re dealing with people you already know and the process should be easier. This is only recommended if there is harmony with the partners or purchaser.
Unless you plan properly, your exit could be determined by unknown circumstances which could be at odds with your desired result. Without a good exit plan you could incur a greater cost, less than desired dollars at close, higher taxes or no sale at all. So, take the time to assemble your team of professionals to help you optimize value and control the transition process in an orderly fashion.
At the end of the day there is no one exit process that fits for all. The right strategy for you depends on many factors and will probably change or develop as you move forward with your business. The best you can do is to actually put a plan in place with your eye to the future. When and if the time comes to act, your proactive thinking and planning will more likely give you the success you planned for when it’s time to part ways.
Bob Wolter is Mergers & Acquisitions Advisor of Creative Business Services/CBS-Global.
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