Strategies for Crafting a Business Exit Plan
A solid exit plan helps you prepare for the future, and may even improve profitability in the present.
Many entrepreneurs are so focused on establishing and growing a business that they give little thought to how they will eventually leave the business. A solid exit plan helps you prepare for the future, and may even improve profitability in the present.
Questions to Ask Before Crafting an Exit Plan
Three simple questions should guide your exit planning:
- What are your financial goals for the business and for yourself?
- How long do you hope to remain involved with the business?
- Whom must you pay off before leaving the business?
Steps for Developing Your Exit Plan
Once you’ve answered a few queries about the future of your business, it’s time to begin exploring your options. Ultimately, devising an exit plan requires six simple steps:
- Get your finances in order. Prepare an accurate accounting of both personal and business finances.
- Weigh your options. Consider several exit strategies and the work involved in each.
- Consult with your advisors and investors. Create a strategy informed by their expert insight.
- Tell your team. Once your succession plan is in place, tell your employees about it, and be prepared to answer pointed questions about their future.
- Tell your customers. If your business will continue in a similar form with a new owner, prepare your customers for the transition. If you are closing, offer alternative options.
- Plan for integration. If you are selling to a new owner, work with them to ensure seamless integration.
Weighing Your Options
The specifics of your exit plan heavily depend on whether you close or sell.
If you sell, there are many ways to do so. Those include:
- Selling to a new owner. This might be a competitor, a family member, or private equity.
- Selling to employees, often through an employee stock ownership plan (ESOP).
You may need to finance a portion of the transaction to make it more palatable to buyers. In some cases, you’ll need to stay on after the transition. Some dealmakers even structure an earnout provision to ensure the owner is compensated for hitting certain benchmarks after closing.
Some owners opt to liquidate instead. This can be a difficult decision, and one that poses significant hardships to customers and employees. There are really only two reasons to liquidate:
- You can’t find a suitable buyer, or don’t want to expend the effort to do so.
- You’ve run your business as a lifestyle business, deliberately extracting as much money as possible from it with the intent of winding down operations.
Ultimately, the right strategy can take several years to develop, and hinges on market, personal, and other factors. The right exit strategy is one that meets as many of your goals as possible. Savvy owners begin constructing their exit plan from day one, but it’s never too late to start. Work with an advisor you trust, since doing so can maximize your total cash payout no matter how you intend to exit your business.