What to Consider When Coming Up With an Exit Strategy

Exit planning affects all aspects of a business: legal structure, revenue models, long- and short-term investment growth strategies, types of potential investors to seek, and much more.

Planning for future transitions is challenging, and exit planning is no exception. An exit plan may not be necessary to leave the business, but it is necessary to successfully part without damaging it.

A well-planned exit strategy limits future risk in selling the business the owner has spent years building. It enables them to make the best out of their business sale proceeds.

What Is an Exit Plan?

An exit plan is usually considered a way for an owner to part from the business. It comprises the strategies that push the company toward its long-term goals. Exit planning reevaluates business direction and leadership, challenges, financial sustainability, and the repercussions of leaving the business. A strong exit plan endorses business potential and anticipates new horizons and a foundation for future goals.

Benefits of Exit Planning

Exit planning also helps businesses prepare for unexpected situations by building an effective business strategy and clarifying goals.

Protect business values: Exit planning protects the value of the business and sets strategies for best business outcomes.

Manage stakeholder transitions: The exit planning process helps transition smoothly to new management.

Attract potential buyers: Exit planning demonstrates a robust commitment to goals and lures potential buyers.

Reduce outlays: An effective exit plan reduces tax liability in business and impacts estate planning to strengthen the future worth of your business.

Clarify exit goals (both for personal and business finances): Exit planning gives direction for business growth by defining the roles and responsibilities of all stakeholders.

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3 Things to Consider When Creating an Exit Strategy

An exit plan defines the value creation target and builds strategies, including how to prepare for the exit, reasons for the exit, and much more.

Consider these three important questions:

  1. When do you want to exit your business?
  2. How do you want to exit your business?
  3. For how much do you want to sell your business?

When Do You Want to Exit Your Business?

The time frame affects how and when you exit. An exit strategy helps owners decide if going after short-, medium-, or long-term income projects best suits their unique situations.

Business owners require sufficient time to finalize their exit goals and determine the suitable exit option. A business valuation before the start of exit planning helps establish the baseline value or the starting point in exit strategy creation.

Business owners also need enough time to come to terms with the actual current value of the business, which is usually less than their estimate. Emotional attachment leads to inflated estimates of company worth. Reality (actual business value) rarely meets expectations (estimated business value).

The following elements make a company exit ready:

Financial performance. Revenue is one indicator of a company’s financial state. Potential buyers check the company’s top line. At least, the company should be earning sustainable revenue from a reliable and diversified customer base.

Periodic business valuations (preferably yearly) help business owners spot weaknesses and define the time frame required to take necessary measures.

Budget and forecast. Budgeting helps business owners maintain good financial plans. It allows them to control the cash flow in the business.

Ideally, a company should have a monthly, quarterly, or annual budget. A company must have a 3- to 5-year budget to forecast income and expenses, including equipment purchases, real estate purchases, etc. Forecasting helps the management team make informed decisions balancing production, services, and resources by using past financial performance to predict future performance.

This vital tool helps determine the business’ long-term viability, reduces financial risks, and helps assess the success of the company’s efforts.

How Do You Want to Exit Your Business?

Business owners can exit the business in many ways. Guidance from exit planning advisors leads to the most appropriate exit route to meet your specific needs.

Different ways in which you can exit your business include:

Selling to a strategic buyer. Large corporations have incubators, accelerator plans, and specialized, corporate developmental units for investments and acquisitions. Collaboration with a strategic investor is a big decision to which all stakeholders should agree. It is essential to understand the buyer’s objective behind a strategic acquisition.

Selling to a private equity investor. Private equity investors invest through corresponding funds pursuing their individual investment strategies. It is essential to determine if your company fits into the investment strategy of the private equity investor. Check for criteria like industry, business phase, level of participation, etc. Engage an advisory team to help prepare for the business transition with a business valuation, financial modeling, and pre-due diligence.

Leveraged buyout. A leveraged buyout occurs when the shareholders of a company buy the existing business owner’s stake and finance it with burrowed funds (loans or bonds). The acquired company’s assets serve as collateral against the debt. After the business transition, the company must pay its debts. Therefore, a company with stable and reliable cash flows best suits this exit option.

For How Much Do You Want to Sell?

Exit planning allows owners to cut their stake or exit the business while making a profit or, if the business is struggling, it helps business owners limit losses. Set feasible exit goals after considering both business and personal goals to determine the price you want to sell your business.

The expected sales price is often more than the company’s current market value. That sale price determines the timeline for the owner’s exit as the company needs time to enhance its value to achieve that goal.

Plan Ahead

You will eventually leave your business, so you need an exit plan to realize your post-business goals to ensure you, your company, and its workforce is prepared for the inevitable transition. A successful business exit, irrespective of the exit option, demands optimal preparation. Get expert advisors on board to affect the smooth execution of the business transition.

Value Scout can help you connect with the best exit planning advisors. Get in touch to know more.

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Matt Lawver

Matt Lawver

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