Developing an exit plan is often neglected due to the ongoing pressures and commitments of building and running a business. Wait too long to develop your exit plan and you risk having to sell your business for too little and at an inopportune time, paying too much tax at the point of sale and beyond, and leaving the business struggling without capable leadership.
Your exit strategy options should be in place early on in your business's development. As when making financial investments, you will benefit from thinking carefully about how to exit your business, right from the time you start it.
There are several reasons for having a formal exit strategy in place:
Maintain control over the exit process. If you are the architect of your exit strategy, then it will be configured to meet your preferences and priorities. Without an explicit exit strategy in place, you will scramble in the event of unforeseen events such as sudden illness or injury. You may be forced to sell into a poor market or even liquidate.
Having a strategy in place won't protect you from poor timing of a sudden illness or injury, but it will set out the steps you want taken, even if you are incapacitated. All business owners, regardless of whether they are contemplating selling their business anytime soon, should develop a written plan to be followed in the event of their unforeseen death or significant disability.
This would include instructions on how to proceed with business transition, instructions for external sale or liquidation if appropriate, possibly “Stay Bonuses” for key employees through a transition period, and life and disability insurance to fund these activities (and perhaps even company overheads) during a transition period.
Provide a forum for setting out and harmonizing personal and business goals. An exit planning process typically starts by sorting out your personal goals regarding timing and nature of your business exit. How much money will you need after retirement to support your desired lifestyle? How much of this needs to come from the disposal of your business? When would you like to retire?
Harmonizing retirement and estate planning with business planning is a unique opportunity only available to business owners, especially joint management of personal and corporate taxes. Too many business owners don't recognize or exploit this opportunity.
Maximize company value at exit. Knowing when you wish to retire and how much you need from your company's sale provides a context for developing your business strategy. This might well mean changing your strategy of annual tax minimization to one of generating a steady profit stream.
It will also encourage you to maintain appropriate levels of capital investments, well-documented internal processes, an attractive facility appearance, a stable and capable management team, positive cash flow, and a strong customer base.
Buyers pay more for well-run companies that will clearly do well following the departure of their founders. Make sure your business can run well in your absence.
Position owners to consider exit opportunities as they arise. By having a strategy in place that positions the company for sale, you will be better able to respond to unforeseen opportunities.
Most businesses aren't ready for sale. Without an active exit-preparation strategy in place, significant price compromises must be made to accept an unexpected offer.
Facilitate survival of the business after exit. Most business owners want to retire knowing they have created something of enduring value, unless their preference is to simply shut down and sell off any assets of value.
What do you need to do to ensure your company carries on after your departure? This is a question about business strategy; specifically about developing a strategy for transforming your business into one that thrives in your absence.
In the best of all worlds, you should start preparing your business for an exit the day you start it. A business designed for maximum value at exit is also a business that is more profitable and sustainable than the rest of the pack. It's just a good idea.