Business owners have several exit options. They may choose to pass their businesses to children or successors, sell to a third party that an M&A team has identified for them, pass the company to employees or the management team, or close the business by liquidating all its assets. Whatever your choice of exit option, your exit strategy gives your company direction.
Outlining the business exit strategy is mandatory for all business owners since it draws a blueprint for the future. It also acts as a goal and measures the company’s success. It shapes the owner’s vision for their life beyond the business. Your business exit strategy is the endpoint of your enterprise, and it maps out a timeline to prepare your business for an eventual sale or transfer. Moreover, if circumstances or market conditions turn volatile, the exit plan can be updated, and strategic decisions made to protect the business.
Time is the most critical aspect while planning a business exit, and most business owners underestimate that aspect. The reality is a successful exit needs several years of steady effort to build the company’s value.
What Is Exit Planning?
Exit planning is an end-to-end strategy that facilitates an entrepreneur’s exit from their privately held company. That strategy acts as a roadmap to help the owner reduce or liquidate their stake in the company while making a profit. If the business is unsuccessful, the exit strategy helps the owner limit their losses.
Advantages of Having an Exit Strategy
- You have complete control over when and how (M&A, MBO, ESOP, succession planning, sell and liquidate, etc.) you exit the business.
- You can protect and maximize the company’s value in good and bad times.
- You have a strategy in place to either minimize or eliminate capital gains taxes.
- You can achieve your business growth and personal retirement goals.
- You can safeguard employee morale by reducing their uncertainty about their futures after your business exit.
Disadvantages of NOT Having an Exit Strategy
- You may overestimate the business’ market value.
- You may not be prepared to safeguard the company’s value
- You may underestimate the value and leave wealth behind.
- You may not know ways to reduce taxes and pay more than anticipated.
- You relinquish control over how you exit your business.
Although a complacent mindset may take your mind off your successful exit, let’s look at three key things that you can do today to begin your exit journey.
3 Simple Exit Planning Tips
1. Maximize Your Business’ Value
Do you know how much your business is worth today? Is that enough to secure your personal needs and retirement goals?
Determining such exact details is more complicated than you might expect. First, you need a detailed record of the company’s financials going back three to five years. Identify the intangible assets and assign values to them. Study market conditions. Once that is done, you need the right buyers willing to pay a premium price to acquire your business.
Only a thorough and impartial business valuation will provide an accurate market value for your company. Your business ambitions combined with a well-planned exit strategy will put you on the right path toward your future financial goals. You will also know what needs to rectify, improved, or eliminated from your business to help you realize your goals and expectations.
A thorough valuation will also analyze existing business operations to find the bottlenecks. Once you have identified the weaker aspects, work to eliminate them. Combining this approach with exit strategy ambitions, you’ll understand if you’re on track with your financial goals or if changes are required to realize your expectations/needs.
Some limit the business value and need a proactive approach:
- Have you structured your business around tax legislation? Doing so may keep profits low to minimize the tax consequences. While that might serve today’s purpose, it does not serve a buyer who wants to see value today.
- Check your business operations. Do you have a frequent shortage of resources and staff or an excess? Eliminate redundant processes and revise SOPs to remove waste.
- Does your business fund your current lifestyle? Does it support your spouse and your children? If so, to what degree do they depend on that funding? Such expenses consume capital that can be reinvested into the business.
2. Don’t Overlook Due Diligence.
Do you know what a potential buyer or investor is looking for in a business? Before you decide to pursue an M&A deal, it is essential to conduct “sell-side” due diligence. Sell-side due diligence will identify issues that can compromise a lucrative deal.
Due diligence is the process wherein you review your business financials and business model and identify the strengths and weaknesses of the management team and existing business processes. This exercise provides you with the information necessary to fix any issues that may come up when the buyer conducts their due diligence.
Due diligence comprises an in-depth study and analysis of revenue, customer base, growth forecast, EBITDA, customer acquisition, new market penetration costs, product and service margins, taxes, ongoing legal issues, HR, IT, and cybersecurity. Your due diligence should include all these aspects and record the findings in a format that makes sense to any potential buyer or investor.
Comprehensive due diligence means accurately representing the revenue model, your business strategy, and financials and ensuring that business projections are derived from past financials and presented in proper reporting standards.
What Should Growth Stage Companies Focus on?
A business in the growth stage is expanding into new markets, products, or both and should focus on the following aspects:
- Tracking all product development costs and costs associated with market expansion.
- Identifying any gaps in business processes and operations.
- Determining how vital the customer pipeline is.
- Determining whether the new products and services cater to the company’s existing customer/client base.
- Determining if business growth metrics indicate customer base growth.
What Should Later Stage Companies Focus on?
Later stage companies are businesses considering an IPO or M&A deal. Buyers interested in such companies are keen on continuous growth and the management and leadership team. Focus on these aspects:
- How robust are the existing systems should operations continue?
- Will the business be able to maintain its revenue growth model?
- Is the management team competent to handle the transition?
- How reliable are the internal processes and existing systems?
Due diligence helps the buyer determine the risks associated with the transaction. Due diligence results may cause the buyer to proceed with the deal or withdraw their offer.
3. Plan for What’s Next
What comes after an entrepreneur’s successful exit receives very little attention in the entrepreneur’s business journey. The sudden transition from running the business to an entirely new lifestyle can be challenging. Few entrepreneurs are prepared to balance their business exit with the challenge of crafting a new life away from the business. However, there are a few ways you can prepare yourself for a sustainable and rewarding life post-exit:
- Be prepared for challenges. Your business was your life! Settling into a new life may take more time than anticipated.
- Wealth and financial planning. Do not hesitate to hire a financial advisor to help you out. The extent of wealth you have pre-and post-deal will dictate your future lifestyle.
- Get clarity regarding your role. Plan what’s next for you and your company. For example, do you want to stay involved in the business? If so, is an advisory position suitable, or are you looking for a more active role?
- Focus on what you can do next. Understand who you are outside your business. Most entrepreneurs identify themselves with their businesses and don’t know who they are after leaving.
- Build a portfolio of activities. Experimentation can be your new theme; explore new interests and hobbies to find new philanthropic goals and activities.
A Huge Impact
An exit strategy makes your business more appealing to prospective buyers, as it shows a clear vision for the company and the departing owner. In addition, the exit strategy highlights the owner is prepared to exit, that the company is prepared for that exit and that the company has grown to meet specific objectives. Not only does an exit strategy secure the owner’s financial future, but it also helps the owner establish their position as a committed seller. Unfortunately, many business sale transactions fail at the eleventh hour because of the owner’s lack of preparedness.
Exit planning and business ownership transition are complex processes requiring expertise, experience, and proper guidance. Value Scout is a value creation platform that helps identify the existing value gap, eliminate business risks, enhance value, and help you achieve your exit goals. Get in touch today to learn more.