Conversations You Should Have Before Creating an Exit Strategy

The majority of your company’s net worth comprises the value of your business. Preserving that value is necessary to achieve your financial goals after your business exit.

When a business owner focuses on increasing value, it often makes the timing of the exit critical, as the business is ready for sale or ownership transition only when the current owner is ready to exit. Connect all routine business activities as key drivers of organizational behavior, risk mitigation, employee engagement, and strategic growth initiatives to increase business value.

All business owners need an exit plan, but most have little idea of exit planning and less about a documented exit plan. A business exit strategy outlines the road to value enhancement. It helps make informed business decisions and aligns the owner’s business, personal, and financial goals. It also provides much-needed direction for business growth by promoting collaborative business practices with key deliverables. Since a company’s success and growth depend on implementing growth initiatives, plan your exit strategy before it’s time to leave to ensure the best outcome for your business.

Before you begin, you need to answer a few questions.

When Do You Want to Exit?

Ideally, business owners should begin exit planning at least five years before leaving their businesses.

Identifying when you want to exit can help with the planning process of the whole exit strategy, as you will be able to identify the existing value gap and also know how much time you have to close it. The earlier you begin exit planning and form an exit strategy, the more clarity you will have for your goals.

Without a clear exit plan, you won’t know for sure which of your decisions will facilitate or undermine your exit success. An exit plan helps you answer the following:

  • Which of these will have more impact on the exit value of your business: top-line revenue or bottom-line growth?
  • How do you make recruitment decisions? Do you add new employees to strengthen the existing team? Are you aware that recruiting new employees can also decrease your short-term profits?
  • Do you have the skills to evaluate a strategic value initiative that contributes to long-term growth?
  • Are you concerned that your strategic initiatives consume more resources and reduce profits?
  • Do you know if vertical integration has more impact on business value than horizontal integration? A business pursuing vertical integration increases its profits by getting better control of its operations, whereas a business pursues horizontal integration by either buying or merging with its competitors.

These crucial business decisions should be addressed when you develop your business exit strategy. When we talk about a successful business exit, it is surprising that owners do not realize the new processes, tools, and growth tactics will take years to implement and produce the expected outcome.

How Do You Want to Exit?

Several business exit strategies are available to you. Your business exit strategy determines what will happen when you leave the business. It also outlines what type of business transition will occur when you exit.

Exit strategy primarily addresses these three aspects:

  1. What will your financial gains be when you exit? Will they be enough to fund your personal financial needs after exiting?
  2. Who will take over your business after your exit? Will the business continue as before, or will it fold?
  3. What is the timeline of your business exit? Will there be a transition period after you leave the business?

Let’s take a look at your exit options.

Sell to a third party: In the absence of a suitable successor, the business owner may sell the business to a third party. In this transaction, the owner receives the bulk of the purchase price at the time of sale. There are three ways to execute this:

  • Sell the business to a third party unrelated to the business.
  • Sell the business to another business from the same industry.
  • Sell the business to investors.

Sell the business to partners: Owners also have the option to sell their business to existing business partners. This is ideal since the partners already understand the business.

Management buy-out: In this exit option, the employees (mainly the management team) purchase the business with their own resources. All business owners can consider this option.

ESOP (Employee Stock Ownership Plan): Employees receive an ownership interest in the company with an option to buy stock in the business. ESOPs are handed out as a part of employee remuneration and share price appreciation.

Transfer business ownership to the family: A business owner may secure the company’s future by passing the business to an heir or successor. The company can be transferred as a gift or outright sale to the successor.

IPO (Initial Public Offering): Often, business owners sell their companies to the public for a higher profit; however, IPO success is challenging to attain, especially for small or medium-sized companies.

Recapitalize the business: The owner changes the company’s capital structure by restructuring its debt and equity mix. The investor uses cash and debt financing to buy an interest in the business, and the owner uses the free capital for other purposes.

Liquidate the company: The owner chooses to close the business by selling all its assets. The cash proceeds are used to pay off any debts and offer a payout to any shareholders.

Related: Guide to Exit Strategy Options. 

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What Do You Want the Company to Be Like After Your Departure?

Your business is your legacy. You have given your sweat and blood to build a company that makes you proud. Understandably, you would regard your exit as successful only if the company upholds your beliefs, values, and vision after you leave it.

To refine your understanding of your business legacy, ask the following questions:

  • Do I want my business to survive? If yes, how?
  • How should the next owner treat my employees?
  • Is the existing company culture important for me? Do I want to protect that culture?
  • How will I feel if my clients and customers favor another brand? Do I want to serve them even after my exit?
  • Lastly, how should I exit to protect my legacy?

To build a business that upholds the owner’s beliefs, apply the three rules of business legacy:

Leave the business in good hands. Whether you are thinking of an MBO, or an M&A, or passing it to your heir, your prime focus should be to make sure the new business owner/leader is committed to its success and is competent.

Build the business for success and sustainability. No one can guarantee the fate of your business after your exit, but while you’re still there, you can still do some things that will help it in the future. If you don’t have a strategic growth plan, now is the time to design and build it for its future success. Likewise, ensure the availability of resources and a competent workforce after your exit. If you have identified a few areas that hinder your business’s growth, start tackling them as soon as possible.

Exit the business with gratitude and grace. For retiring owners, your exit marks the end of your professional journey. Like all farewells, this is an emotional time. There would be many people to thank, matters to resolve, and crucial conversations to take place. Be prepared for this aspect of your exit.

The more prepared you are, the better your approach will be. Knowing what you want your legacy to look like will also help you choose a buyer and make decisions within your exit plan.

Start a Legacy of Results

To maximize your exit outcome and build a legacy business that thrives long after you leave it, focus on the following:

  • Train employees and key personnel, delegate tasks to them and eliminate business dependency on any single person.
  • Build a leadership team for the company’s long-term, sustained growth.
  • Focus on building the brand image.
  • Resolve all ongoing internal or legal issues.
  • Implement strategic growth initiatives for smooth operations.
  • Hire an experienced exit planning advisor and an advisory team to guide you.
Author Summary:
Matt Lawver

Matt Lawver

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