Although it’s not the most exciting or desirable part of running a business, planning your exit strategy is one of the most important things you can do for yourself and your business. An exit of some sort is inevitable for every business owner. However, the key to making things run smoothly is to start thinking about an exit as soon as you start your business. It may seem premature but it can help ensure that you leave the business on your terms when the time comes. Part of the strategy of owning a business is knowing when to let go of your ownership. However, developing an exit strategy looks different for every business owner. But there are common threads that can provide guidance in many different situations for exit planning.
Handing over your business at the right time can be an extremely difficult decision – but it’s an extremely important one. If you choose the right time, you will likely benefit financially, personally, and professionally from the decision. If you wait too long, or not long enough, you may be leaving cash on the table.
In this article, we will discuss the pillars of planning for business exits. We will review:
- reasons to have an exit strategy
- tips and considerations that most successful business exit strategies have in common
- different types of exit strategies to consider
Succession Planning vs. Exit Planning
First, we want to clear up a common misconception. Many people confuse succession planning and exit planning and even consider them as being the same thing. These two plans are actually separate entities.
Succession Planning is centered around the business. Its focus is on continuity within leadership and management at a company following an owner’s exit.
Exit Planning is owner-centric. It addresses issues directly relevant and critical to owners. Issues like whether they can leave the business when they want, leave it to whom they want, and whether they are provided with the money they want and need.
Although they are separate entities, succession planning and exit planning are not entirely exclusive to one another. Frequently experts in each area work together so that the succession plan for the business fits neatly into the owner’s overall exit plan.
Reasons to Have an Exit Strategy for a Business
There are many reasons to develop an exit strategy for your business. One is that having a well-thought-out strategy is in the best interest of the business itself. Founders often have a strong attachment to their businesses. So, having a clear exit strategy greatly increases the chances of your former business continuing to be successful for years to come.
As mentioned earlier, having a good exit plan is also in your best interest as the founder. Knowing how and when to exit can result in a substantial profit if the business is successful. Conversely, it can help you to limit your losses if the business is not as successful. But keep in mind, the process takes about three to five years, so giving much thought to the needs of your company is key.
Guidelines for Crafting a Successful Business Exit Strategy
Speak with Advisors Sooner Rather than Later
Engaging a business advisor, specifically an exit planning advisor, in the early stages can help keep your plan on track. A successful plan takes years to cultivate. So the better relationship you have with your advisor, the more you can ensure that they have all the info and insight they need.
Plus, you can gain insight into your business’ assets, what to do with a cash surplus, and tax planning.
Cultivate Company Culture Early On
Human capital will always be your business‘s greatest asset. You want to ensure that your organization has a solid company culture and that team members are on board with the culture early on. This will give you long-term success and you’ll avoid major potholes along the way. You want to make sure you’re doing your part and building up your senior team so that when you do eventually make your exit, there are no hiccups or detrimental consequences.
Identify Target Buyers
One piece of your successful business exit strategy will be navigating the buyer. Priorities will differ depending on whom you choose to sell to; for example, if selling your business to a family member, you should go the extra mile to keep things transparent and fair. If selling elsewhere, you want to start ahead of time to get all of your records in order.
If you choose to sell to a third party, take time to carefully consider whether or not you have the knowledge to make that transfer for maximum cash and minimum taxation. And if you’re selling to an insider such as a co-owner or employee, do you know how to transfer it for cash rather than for free?
Write Everything Down (or Type it Out)
Another task you’ll want to start early on is compiling a “how-to” guide for the next person in charge. You want to list everything you can think of that would be essential to running your business successfully. Write down your processes, the tasks you follow to complete them, and even create formal job descriptions for each employee.
Explore All Options
Familiarize yourself with all of the different options for exiting your business. We can walk you through all the possibilities and help you evaluate which will work best for you and your business. We will also review some of these options below.
Save the Date
When starting to plan an exit strategy, even years in advance, you will want to identify a solid range of time for your departure. In the early stages, you don’t necessarily need to choose a specific date, but you will need an idea of when you want to bow out.
A ballpark range is appropriate, for example, if you are currently 40 and know you’d like to step down in your early 60’s, it’s good to keep in mind.
Establish your objectives
Have you determined your retirement goals and the cash that it will take to reach them?
Appraise business and personal financial resources
Maximize business value
What are the best ways to increase your company’s value and cash flow?
Do you have a succession plan in place to protect your business if you die or become disabled prior to your exit?
Personal wealth and estate planning
Do you have a plan to assure your family’s financial security should you pass away or become disabled?
Choosing the Right Exit Planning Strategy for your Business
Should you keep the business in the family?
There are certain practical and emotional advantages to keeping your business in the family. If you are passing down your business to a close family member, you will have plenty of time to prepare them for the transition of ownership.
This can mean anywhere from a few years to a few decades of working closely with a family member. A relationship like this rarely occurs outside of the family. Transferring ownership to someone in the family will often provide you with a successor to carry out your business’s legacy the way that you intended.
The disadvantage to this strategy is that the new owner might not end up carrying out the legacy you intended.
Should you go public?
Going public through an Initial Public Offering (IPO) is tempting, but unfortunately not realistic for many business owners. The IPO is only a viable option for fairly large and successful companies. Pursuing an IPO requires a great deal of strategizing and impeccable timing. Not only does your business need to be performing well, but it also has to hold public appeal at the exact moment in which you go public.
In addition, you must be prepared to provide extremely detailed reports about your business, including financial reports, management data, staffing summaries, and much more. The clear advantage of going public is that founders of successful public companies are typically positioned extremely well in terms of cash flow.
The disadvantages are that it is extremely difficult and rather expensive. Some businesses that seek IPOs are either not successful, or break the bank doing so.
Should you have to choose liquidation…
Liquidation refers to closing your business and selling all of its assets, effectively shutting down the company. When liquidating a business, the proceeds from asset sales will first go to creditors, and next to the company’s shareholders. While the decision to shut down is extremely difficult, business owners usually end up saving more money than they would have by dragging the business out for years to come.
Another advantage is that liquidating a business is a fairly straightforward process. It involves very little negotiation or stress around what will become of your business.
Liquidation does, of course, present some disadvantages. It means that your business will no longer exist. It also offers comparatively little in terms of compensation to the business owner. Employing liquidation as a business exit strategy can also do damage to your stakeholders, employees, customers, and business reputation. For these reasons, it is wise to make careful considerations before choosing to liquidate your business.
What about a Management Buyout or selling to a Venture Capitalist?
Sometimes the management team and even some employees would like to invest in the sale of the business. You know your employees, and this could be a good option if they share the same enthusiasm about the legacy of your business as you do.
Getting a venture capitalist involved is a different story, as this might be a group of investors, looking to expand or move on a company. They certainly have their own agenda, so it is wise to give due diligence and vet the interested party. However, as with taking any kind of risk, the sale could be highly beneficial to the business owner looking to sell.
Should you plan for an acquisition?
Acquisition is a fairly common exit strategy for a business and refers to recruiting another business to acquire, or buy, your own. A successful business acquisition is one of the best long-term things that can happen to a business owner ready to step aside. When done well, an acquisition can result in your business maintaining its mission, reputation, and client base.
Acquisition can also mean different things to different companies. Since the negotiation is in your hands, you have the power to choose your involvement level in the business post-acquisition.
Like all the other business exit strategies that we have discussed, acquisition has its advantages and disadvantages.
A major advantage of pursuing a business acquisition exit strategy is that you get to do the negotiating. Unlike an IPO, when you seek out another business to acquire your own, your fate is in your hands. Not only can you hold out for a desirable price, but you can also cater the negotiation to reflect your desired involvement in the business moving forward.
Acquisition has its disadvantages as well. It can be especially difficult for owners/founders with a strong attachment to their company. Although you can negotiate a certain amount of involvement with the business, when you allow another business to acquire yours, they are in charge. It is also an option that the acquiring business’ only goal is to eradicate the competition, which could result in your business being liquidated shortly after the sale. This can be painful for staff as well as owners.
Get Expert Guidance on Exit Planning for Your Business
There is a lot to think about when creating an exit plan for your business. Save yourself trouble down the road by planning and bringing in experts, prioritizing valuation, and being proactive.
These are vital steps that will set you and your business up for future success. While some may see prepping a business exit in the early stages as pessimistic, it can actually make things run more smoothly and stress-free for everyone whenever you do make your exit.
Whatever the best option for you and your company, be sure to consider it carefully. It takes dedication and hard work to run a business. Make sure that when you sell the business, it pays off with a well-executed business exit strategy.
At Saddock Advisory, we can help determine if your business is financially healthy. Get in touch with us here to find out more.