No one starts a business with the intention of selling it after a few years. As a result, many business owners neglect business exit planning until a significant change is staring them in the face. Entrepreneurs risk limiting their business’ future options by not planning an exit strategy. It is imperative to plan your exit strategy before leaving your business.
By implementing an exit strategy, a business owner can liquidate or reduce his stake in the business and make a significant profit with a business that is flourishing. If the business is unsuccessful, an exit strategy will limit losses. Likewise, investors like venture capitalists can use exit strategies to plan for cash-outs of investments.
How does a business exit strategy work? What are the steps to creating a customized plan that works for you? Find out more by reading on.
Business Exit Strategy: What You Need to Know
A business plan should include an exit strategy for entrepreneurs before starting a company. Exit plans can significantly impact business development decisions. Management buyouts (MBOs), strategic acquisitions, and IPOs are common exit strategies.
Entrepreneurs choose exit strategies based on various factors. These include the amount of control and involvement they wish to retain in the company, whether they would like to see the company run the same way after leaving, and whether they would be willing to see it shift as long as they are paid well.
Some specialists can assist business owners (and buyers) in determining a company’s fair value as part of an exit strategy. Transition managers can also assist sellers with business exit planning.
The exit strategy is an essential part of a well-thought-out business plan. It can help you achieve strong financial returns by focusing on maximizing multiples. Ideally, an exit strategy should also incorporate succession planning to ensure the business’ future ownership structure and direction are stable.
Important Considerations in Business Exit Planning
Exit strategies differ depending on the type of business, but some elements are universal. These factors include the company’s financial circumstances, market conditions, objectives, timeline, and potential tax benefits like Qualified Small Business Stock status.
- Objectives – In any business exit strategy, the owner’s individual goals should never be overlooked. When the owner exits the business, does he want to maximize profits or leave a legacy? A clear understanding of the purpose of exiting the company will help identify the specific objectives and activities that must be prioritized.
- Timeline – It is also important to consider the business’s time frame. There must be room for flexibility when establishing a time frame for a business. Doing so will give the owner more negotiating power. Business sales, however, could go awry if the deadline is tight, as everything will be rushed. Furthermore, stakeholders might not have enough time to achieve the business’ full potential.
- Business Objectives – Should the firm’s operations continue or be dissolved? Answering this question is critical to determining how to proceed: liquidation, merger, sale, or succession.
- Market Conditions – A company’s supply and demand for its products are all factors to consider.
Tips on Successfully Implementing an Exit Strategy
An exit strategy provides business owners with a roadmap for leaving or transitioning out of their company. To make the transition seamless, here are some tips:
Consult with outside experts.
Establish a professional team for the sales process since your buyer is almost certain to have one. If you want to sell a company successfully, you want to have people on your side who understand the intricacies of the process.
If you plan to put your company on the market, hire a part-time CFO or fractional CMO well in advance. You need experienced, proven talent with strong business connections to help you improve your organization. If a deal becomes available, they can assist in executing your exit strategy.
Keep your accountants close to you and your accounts in order.
Your accountants should know that you would like to be permanently ready if you receive a purchase offer out of the blue or decide to sell your company. Identify the financial areas your buyer type is most interested in, and make sure your accountant updates the company’s financial reports every week or month.
Get a corporate lawyer on your side.
You should hire a lawyer with mergers and acquisitions (M&A) experience. It’s common for the other party to defend their interests and try to lower the selling price. As such, you need someone to advocate for your interests.
Set up your data room.
It is now common for data rooms to be virtual, and the professional teams representing the buyer and seller usually email documents to one another. Get your accountants, lawyers, and managers to immediately submit monthly updates to your online data room. Your goal should be to provide information as quickly as possible, which will keep buyers happy.
Be Prepared for the Eventual Exit
You will eventually have to exit your business, regardless of whether you control it. So, it’s better to start preparing your business for the next owner now. By doing so, you can command a better price and increase your chances of survival.
Just remember that whatever you do to help your future buyer will also help you in the long run. Your business will be more efficient, profitable, and easier to manage.
It’s never too early to develop an exit strategy for your business. Consult your accountant or business advisor as soon as possible.
