Why Every Business Owner Needs an Exit Strategy

Planning your exit from your business is daunting. Like most business owners, you are unsure about where to start or how to go about it. Numerous aspects will require your attention, and you have thousands of other things to manage. To make the exit process easy, streamlined, and profitable, you must start exit planning early.

An exit plan is not a static document; rather, it’s a fluid process that evolves and needs periodic review. Best results occur if you start planning your exit in the initial phase of business. Early planning helps business founders structure their business towards their desired exit goal, acquisition, or succession.

Your business’s exit strategy also directly impacts its legal structure, revenue models, and tradeoffs when investing for the short or long term. Even if you have to exit earlier than anticipated due to burnout, ill health, death, divorce, etc., it helps if you have planned for the exit.

When entrepreneurs reason about exit options right from the beginning, they can easily align their future financial needs with current business objectives.

Related: Exit Planning Strategies. 

Top Reasons to Develop an Exit Plan

Freedom to Determine the Optimal Time of Exit

An exit plan gives you a blueprint of actionable items for your business. When you plan strategically, you get to decide what you want to accomplish from your company, even if you have no plans to exit shortly. An exit plan will help you think through the various options and formulate an exit strategy that works for you.

Critical Considerations for Exit Strategy:

  • Current industry trends: Study trends to understand what is happening in the market and industry. Do you want to sell to a VC firm, offer an IPO, or sell to private shareholders? What are your competitors doing to fund their business interests?
  • Keep an eye on long-term goals: Do you need additional financing in the next three to five years? If yes, have you identified the source of funding?
  • Take care of your immediate business needs: Does your business need financing now? If yes, do you know how much capital you need to care for the business’s primary needs?
  • Protect the value of your business: When you are aware of what’s going on in the market and your industry, you can prepare a contingency plan to safeguard your business’ value. Your business is an asset, so whether you decide to exit now or five years from now, preserving and growing the enterprise value is of utmost importance.

Protect Your Family

The ongoing COVID-19 crisis has reinstated the importance of being prepared for unexpected events. The pandemic acted as a wake-up call for business owners around the globe. Business operations changed overnight; some businesses temporarily shut down, unable to cope with the changing business model; remote work became the new norm. A noticeable outcome of the pandemic was a sudden surge in succession planning.

Ask yourself these questions when planning business succession:

  • What is my goal for the business? Has it changed due to current circumstances?
  • When, exactly, do I want to retire from my business?
  • Is it necessary to keep the business in the family? Do I want to get an investor and retain some control over the company?
  • Who are my potential successors and essential employees? Does my successor possess the required skills to take over control? Do they even wish to take over the business? Do they have the resources to fund this acquisition?
  • Will there be a lasting impact of this transition on my customers?

A solid exit strategy not only calms your nerves but also gives your family security, knowing their financial interests are protected even in your absence. Having a succession plan will ensure the future continuity of your business and help successors adapt to their new roles with confidence and without scrambling to pick up the pieces.

Exit Planning Tips

To be ready for an exit, the owner has to build a business attractive to investors, setting a high bar. For example, the company’s future potential and management style have a decisive influence on the sale price of the business. Often, clients are caught off guard by the amount of scrutiny the buyer applies during due diligence processes, revealing the issues that could have quickly been addressed before taking the company to market.

Business owners certainly have a lot to think about, but a few key places to start are:

Optimize Corporate Structures

If you want to be prepared for an exit, consider some legal and organizational aspects now. Begin by asking a few questions:

  • Do you have suitable systems and processes in place? Or does your business solely depends on your goodwill in the market?
  • How many clients do you have currently? Does your business depend on a handful of clients for recurring revenue stream?
  • Is the viability of your business threatened by ever-changing market conditions?
  • What issues, if any, do you have with key employees? Do you have to incentivize frequently them to retain them?

When you prepare a checklist, you will identify and uncover internal governance issues that plague your business. These issues have to be resolved as quickly as possible as they have a long-term direct impact on the value of your business.

A process-driven approach to integrating departments and units under one umbrella will bolster the health and culture of the company. Also, collaborating with a valued advisor will ensure that you have the proper corporate structure to prepare for a future exit.

Improve Fiscal Governance

All business owners are faced with two pressing concerns:

  • Effectively managing the cash flow for their business success, and
  • Maximizing the after-sale proceeds of the business.

Addressing those concerns means the owner needs a well-thought-out plan to create a cash flow forecast that anticipates current and future capital needs. This requires meeting with the finance and accounting personnel to understand where the money is coming from and where it is being spent. Owners should also take into account the reliability and speed of their financial reporting.

Periodically verify that your company’s stock ledger is regularly updated. There are no missing stock certificates, insurance is up to date, and key supplier and customer agreements are up to date. Taking care of these small yet critical details also prepares your business for an eventual transition. An external investor or buyer will want to see how your company makes money.

Focus on Value Creation

Having a “growth plan” is a must for value creation. The plan’s objective is to provide the business owner the desired amount of cash for post-exit financial stability and fulfilling other purposes.

To prepare your company’s growth plan, first, get the current baseline value of the business to identify where it stands now and project where you would want to see it in the next few years. Get an idea of what value you’ll need to retire. Establish the value gap, and focus on what you’ll need to do to get there. Once you have identified the value gap, you can begin working your way through “value drivers.

Begin Now!

Crafting and enacting the right exit strategy takes time, so the earlier you begin, the better it is for your business. The past year has been an eye-opener for all of us: the sudden disruption due to COVID-19 threw many companies into crisis management mode. To beat market conditions in a volatile economy, owners must become vigilant to correctly identify the weak areas of their business.

Identifying, building, and addressing the business’ strengths, weaknesses, opportunities, and threats are essential for sustainable performance over time. But the most crucial aspect is getting the timing right … the longer you wait, the greater chances of you missing the bus!

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Matt Lawver

Matt Lawver

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