Business owners often delay the exit planning process until forced by circumstances because they do not appreciate the benefits of starting early even though they know they must eventually leave their companies.
Owners of new businesses have the excuse of focusing on growing their businesses, but it’s never too early to start exit planning, no matter what stage of its lifecycle. Exit planning does not only concern the owner’s actual exit from the business; it also means achieving your future business goals. Business owners often overlook how exit planning provides their companies with strategic direction.
Think of exit planning as something that helps your company transition to the next level. When your business gets to that next level, your role in the company changes, which is also a kind of exit. You limit future options for your heirs or successors by not including exit strategy in your overall business strategy.
What Is Exit Planning?
Exit planning is the roadmap that leads you to your desired business exit. It includes well-defined strategies and tactics to meet your exit goals (both personal and business).
Exit planning ensures that you and your management team know what to do and avoid chaos when you leave your company. It helps you control the timing and terms of your exit and allows for smooth ownership and operational transitions.
With effective exit planning, you may maximize your company’s valuation and sales proceeds and minimize taxes. Contrarily, poor exit planning leads to failed transition or a forced exit that does not serve your best interests.
Exit planning includes an in-depth analysis of your company’s financial health, the legal and tax options available, and the possible consequences of exiting your company.
Building Momentum for Exit Planning
As a business owner, you must understand how an exit plan helps you and your business. Just having an exit plan:
- Creates value in itself
- Schedules time to create value for your business (i.e., selling it for more).
Value in Itself
The mere existence of a thoughtfully developed exit plan creates value for the business in many ways:
It provides a clear vision for the future. A well-defined exit plan creates a strategic direction for your company’s growth. This helps you create your succession plan, identifying which person or company will take over your business. An exit plan helps you plan your talent needs, whether to hire employees full-time or freelancers. It facilitates setting goals and defines the actions to achieve them.
It helps identify mediocre offers. Unprepared business owners often waste time considering any offer that comes by. They fail to identify mediocre offers because they have not established their exit goals and the company’s current market value. Exit planning helps you evaluate a proposal’s merits.
It reveals your company’s current market value. As exit planning begins with an initial business valuation that thoroughly evaluates your company’s financial position, intangible assets, potential buyers, and market conditions, it determines the current market value of your business. Knowing the worth of your business if you were to take it to market today serves as the baseline on which to build your exit strategy. It also helps you make informed decisions if you are already getting M&A offers.
It helps identify the best time to sell. An exit plan aims to provide your desired exit by meeting your exit goals. Exit planning helps identify the timeline required to develop your business and prepare it to sell at the desired price so you can achieve those goals.
It makes your business more attractive to buyers. Exit planning allows potential buyers to see a clear vision and the goals for the business. It reveals the effort, time, and resources you have invested in ensuring that the business achieves those goals. It also communicates that you are ready for the ownership transition, which will likely conclude smoothly.
It prepares you for the exit. Often, a business owner is not psychologically prepared to leave the business they have worked very hard to build. An exit plan reminds the business owner of the goals they want to achieve and motivates them to carry on with the process.
It protects current business value. Your business builds value for you by accumulating assets and creating future profit potential. However, when you do not plan your exit, the outcome is more likely unfavorable for you and your heirs. Business owners don’t always exit for wealth. Unforeseen events like death, disability, family circumstances, etc., may force them to leave early. Therefore, starting the exit planning process early protects the business’ existing value and ensures that you can reap the monetary benefit of your efforts.
It protects you financially. An effective exit plan also helps protect your finances. By planning for the day you leave the business, you include executive compensation such as a pension, buyout package, or insurance policy to protect your interests.
Exit planning ensures that everything is under your control and there are no surprises from a company merger or takeover.
Time to Create Value
Current market value is usually insufficient to meet a company owner’s exit goals; therefore, the business needs time to enhance its value and sell for a higher price. To help your business value grow:
It creates value creation initiatives and implements them. A professional business valuation helps you identify your company’s value drivers and destroyers. Exit planning advisors strategize to eliminate value destroyers and enhance value drivers. They develop value creation initiatives and implement them.
It helps you take advantage of a strong market. Time is money. Exit planning helps you identify the best time to sell your company, so you can capitalize on a conducive seller’s market and get maximum offers.
It prepares you for negotiations. Exit planning calculates your company’s worth and the reasons behind it. It shows how the business will continue to remain profitable. This information helps you negotiate from a position of strength and convince potential buyers that your company is a good investment.
It provides documentation for the exit. The exit planning process helps you prepare the proper documents required for an exit. Exit planning advisors prepare your business for the due diligence process, the prospective buyers’ conduct, and the documentation for the ultimate transition.
It gives you post-exit control. Exit planning helps business owners plan their future beyond the business by setting business goals and planning initiatives to achieve them. They enhance business value to the required level.
Now Is the Time to Act
Irrespective of the age of your business, the ideal time to start your exit planning process is today. Exit planning helps owners leave their companies and facilitates achieving their business goals.
An exit plan is valuable in itself. An exit plan provides you with a schedule of tasks and deadlines to create value for your businesses and sell it on your terms. Expert exit planning advisors can help you get your desired exit or take the next significant leap in business.
Value Scout can help you connect with experienced exit planning advisors. Get in touch to know more.
