As a business owner, you have spent years building your business, you take pride in the company you build, like your work, and are proud of your business’s success. But have you also taken adequate time to safeguard your business’ future with exit planning? Probably not!
Often owners get so busy with the day-to-day business activities that designing an exit plan takes a back seat. Unfortunately, overlooking this critical aspect has repercussions since the owner’s wealth is also tied up in their business.
An exit plan safeguards your financial interests, as its primary focus is to maximize your business’ value to meet your post-retirement financial needs. Unfortunately, most owners don’t think about an exit plan until it’s time actually to leave their businesses.
All business owners eventually leave their businesses, so being prepared serves your interests.
What Is an Exit Plan?
Exit planning is a business strategy for exiting a privately held company. It comprises a complete analysis of financial, legal, and tax options and highlights the repercussions of leaving an organization in an unplanned manner.
Preparing for exit from one’s business takes time, effort, and strategy. A strategic exit plan will help the business owner as follows:
- Maintain complete control over the exit process and the time of business exit.
- Enable them to fulfill all their personal financial goals post-retirement.
- Focus on their retirement plans.
- Help them explore all the available exit options thoroughly before choosing the one that suits their needs.
- Enables them to focus on the long-term growth and sustainability of the business.
- Manages the tax implications upon the sale or transfer of the business.
Enterprise value is derived from three key sources:
- A business’ tangible assets
- The value of all the intangible assets comprises intellectual property, human capital, relational capital, etc.
- The value of a business’ structural capital, including aspects like innovation and process capital, organizational capital, etc.
Consequences of Not Planning Your Exit
A strategic exit plan gives the business owners the choice of picking the time of their business exit. Failing to plan your exit from the business may result in the following consequences:
When you leave, your business should be your choice, not a decision forced upon you. A business owner prepared to exit his business will safeguard his interests should an untimely departure be required.
Business exit planning helps to monitor favorable economic conditions, keeps track of business industry trends, and sets a timeline to attain personal goals and the most advantageous stage in the life-cycle of your business.
According to a survey conducted by Exit Planning Institute, approximately 50 percent of owner exits are not voluntary but due to one of the five Ds: death, disability, divorce, distress, or disagreement among business partners.
An unexpected business sale may result in massive undervaluation of the business and sometimes even liquidating its assets. An exit plan manages business risks, implements strategic action items, and highlights re-risking measures that protect the business value. So, even if you have to exit your business with little notice, an exit plan limits the impact of negative circumstances.
Leaving Without a Plan Disrupts Everyone
An exit plan acts as a framework that secures the company’s future. Its focused trajectory toward growth benefits all the other people involved.
When you exit without a plan, you disrupt those involved in your business. Employees and colleagues will worry about their future security, and partners may be skeptical about their partnership terms and the current status of their investment.
A business exit is more than just a corporate strategy for managers and employees; it is often traumatic and personally disruptive. During your business exit, they must deal with the additional workload and sometimes even chaos. With added stress and no job guarantee, employees fixate on aspects they can’t control. Who will lose their jobs? Who will be promoted? Will they be relocated or reassigned?
Employees often react negatively to the uncertainty resulting from your unplanned business exit, especially if they are unhappy with your exit decision.
Undervaluing Your Business
The primary goal of an exit plan is to increase the business’ value and ensure that it is not undervalued. The exit plan also outlines the value creation strategies that the company should implement.
Structural changes in the business and an inability to adapt to the fast-changing business environment expose your business to risks that may result in economic setbacks. The absence of a business exit plan also creates ambiguity around continuity and succession, especially if you haven’t delegated responsibilities to others.
If you haven’t planned your exit, you probably haven’t gotten a business valuation. As a result, you may be selling your company for less than it’s worth.
Not Achieving Your Retirement Goals
Most business owners are so involved in their day-to-day operations that they often forget they have a life beyond work. Business owners need time to do what they want to do after they exit the company. They also need time to plan their finances to support that post-corporate life.
In the absence of an exit plan, you face the possibility of not achieving retirement and other value-based goals, such as contributions to the community, benefits for employees, personal philanthropic goals, and taking care of your business legacy. You decide what matters most to you.
Selling a business without a plan jeopardizes many things. The owner likely will not realize the value he deserves, forcing a lifestyle adjustment to something less comfortable than anticipated.
Planning to Leave Is Planning for Success
“Great things are not done by impulse but by a series of small things brought together” – Vincent Van Gogh.
The key to a successful business exit is to focus on small, strategic steps that build business value. Failure to plan your exit exposes your business to disruption, whereas a planned exit takes care of you, ensures your business is in good hands and doesn’t leave your employees and colleagues in a lurch.