When starting a company, entrepreneurs seldom prioritize an exit strategy. Unlike investors who generally seek a return on investment, business owners are primarily concerned with operating (and expanding) their businesses. This necessitates a thoughtfully prepared and implemented exit strategy to ensure the entrepreneur’s financial well-being after leaving the company and the investors’ profit.
Business exit is a process, not a single action. This process takes time and will significantly affect many people, so business owners should put a lot of thinking and study into it to determine the option best for everyone affected.
What Is an Exit Plan?
As per Divestopedia, “Exit planning is the complete strategy for exiting a privately held company. It involves analyzing the financial, legal, and tax options and repercussions for leaving an organization.”
For a business owner, exit planning has several advantages, including:
- Assisting you in achieving your business and personal objectives
- Controlling when and how to leave
- Increasing the worth of the firm
- Reducing, postponing, or abolishing capital gains, estate, and income taxes
- Making retirement easier
- Ensuring the company’s existence and growth
- Maintaining family unity in situations when numerous family members are active in the company
- Defining strategic alternatives from which to select
- Developing a well-understood procedure to be followed.
A good exit plan helps recognize the business’s actual value and provides a foundation for achieving future goals and new directions.
How to Create Your Exit Roadmap
- Identify your business’ value
- Identify your value gaps
- Identify when you want to exit
- Identify what to do before the business exit
- Do your due diligence
- Sell or exit!
Identify Your Business’ Value
When it comes to increasing business value, don’t be tempted to focus on profit and overlook the value drivers that push the multiplier factor higher, increasing the likelihood of a lucrative exit.
Know where to start. Don’t overestimate the firm’s worth. The first step in exit planning is, to be honest with yourself. A professional business valuation conducted consistently will assist you in comprehending your company’s development and worth.
Growing businesses obtain better bids. Suppose you can demonstrate steady growth and the possibility for additional expansion by recognizing possibilities such as functioning in a different market or cross-selling services to existing clients. In that case, your company’s worth will rise. (Read more on how exit planning leads to increased value.)
Identify Your Value Gaps
The first step in establishing that the value gap exists is identifying your future ambitions.
According to Divestopedia, “A valuation gap is the difference in the actual market value of a company and the value that the owner expects to sell it for to achieve his/her needs.”
The value gap could be the difference between your current financial resources and future financial needs or take the form of enterprise value (the difference between your company’s current and potential value).
Value chain analysis allows you to examine vital and secondary company processes and uncover solutions to enhance efficiency, increase value, and differentiate yourself from the competition. This entails dissecting corporate logistics, operations, and firm infrastructure to disclose the actual value of a product or service. Click here to learn more.
A thorough exit strategy assists you in addressing all relevant components (including financial and tax preparation) and closing value gaps.
Identify When You Want to Exit
Unfortunately, most business owners misjudge the time of their actual exit: they are more concerned with sales, cash flow, or profit and miss out on increasing the business value of their companies. So, begin by getting a realistic idea of the time you will need to execute all those value-building strategies.
An unplanned, quick sale of the company may lower the sale price. In general, the longer you can hang onto the firm, the more probable it is to execute a detailed exit plan in place and gain maximum sales proceeds.
By reducing the value gap between your existing and desired business values, you also minimize the gap between your future ambitions and current financial resources. These value disparities are essentially two sides of the same coin. The more sales proceeds you receive, the more money you will have to live life on your terms.
Identify What Needs to Be Done Before the Exit
Identify your company’s strengths and build on them to make them more valuable. Similarly, identify and address significant roadblocks.
Try answering these critical questions:
What makes your business great? Identifying and controlling value drivers allows the management team to create and execute customized activities to increase business value.
Do you have loyal customers? Loyal customers prize quality over product or service advertising. Even if they make a substantial purchase, a one-time shopper has little influence on your organization. However, purchases from customers who buy your services or items regularly add up over time. Loyal customers talk, and word of mouth is the best marketing strategy with no expenses from your pocket.
Do you have an outstanding product? Products with few differentiating traits tend to lose value over time, shrinking profit margins. As a result, corporations attempt to postpone commoditization for as long as possible to preserve the uniqueness of their product offers.
Delay commoditization by combining commoditized products or services with related offers to produce appealing packages with a unique combination of offerings—even if the offerings themselves are typical.
What is the value of your intellectual property? Trademarks are the most visible and well-known category of intellectual property. Consumers use trademarks to express strong preferences about shopping and buying. Every brand leaves an impression on the quality and expense of the purchasing experience.
Another aspect of intellectual property that may readily add value to your organization is copyright. Because copyrights are often granted for a lengthy period, copyrighting a valuable piece of software may be incredibly beneficial when negotiating with potential consumers or business partners.
In today’s growing world, a company’s core worth is no longer based only on its tangible assets. Instead, the ultimate value is found in developing and monetizing intangible assets that your organization can protect as intellectual property. It converts intangibles into value, which raises the total worth of your company.
Do Your Due Diligence
Regardless of the context of the transition—sale, transfer to a family member, or entering into a partnership—the new owner will almost certainly carry out the due diligence process to identify financial issues and related liabilities.
This intensive investigation highlights the business’s worth and its potential blind spots. It also ensures that they overlook nothing. It shields buyers from legal difficulties like tax fraud, etc. It identifies potential red flags that might cause issues during the transaction or prompt a buyer to decide not to submit an LOI (Letter of Intent) at all.
As a business owner ready to sell your company, it behooves you to complete pre-diligence to identify concerns and execute remedial action to mitigate risks before the company goes up for sale.
Use the following best practices to help with your company’s due diligence.
- Put yourself in the buyer’s shoes to predict what they want to know.
- As the seller, you are responsible for sharing the information a buyer needs while still protecting your intellectual property.
- Review unresolved and possible litigation with an attorney, keep relevant documents organized and readily accessible and settle issues before they detract from your company’s appeal to a buyer.
- Reply to a buyer’s due diligence inquiries in an organized, precise, and thorough manner to build credibility and confidence in your organization’s quality.
Sell or Exit!
Selling a business is complicated. You may need to hire an exit planning advisory team, complete with a broker, accountant, attorney, etc. Profitability is determined by the purpose of the sale, the time of the sale, the strength of the firm’s operation, and the business structure.
Common exit strategies include strategic acquisitions, initial public offerings (IPOs), and management buyouts.
An exiting entrepreneur determines their exit strategy by the role they want to play in the company’s destiny. A strategic purchase, for example, frees the entrepreneur of all obligations to the firm when they relinquish ownership of it.
Choose what works for you and what promises a fruitful future. Think thoroughly about your exit approach and specify it in your company plan. Examine how your exit strategy will impact your business decisions and plan accordingly.
Good for the Company and You
Even if you never sell your firm, having and implementing an exit plan allows you to employ your organization’s resources for maximum enterprise value effectively. As a result, all essential stakeholders have alternatives, an appealing position for any firm. Furthermore, it prepares you and them for a transition that is an unavoidable part of any business life cycle and which, when well planned, may lead to a low-stress, orderly departure.
Begin taking the necessary actions to guarantee that you depart on your terms by working with a professional exit planner. Our professionals at Value Scout have worked with various enterprises to ensure that the process goes smoothly and that owners realize their objectives for the next part of their lives. Connect with us today to ensure a safe and sound exit plan.