Key Components of an Effective Exit Plan

Exit Planning Guide

Every business owner either knows or comes to realize that they don’t want to keep their business forever. Despite this, many business owners find that exiting their business is no easy task. The process is often very emotional as the owner is giving up something they’ve passionately worked hard on and built over years or decades. This can lead to decisions that are made with clouded judgement which can cost the business or the owner greatly. Having a thoughtfully developed exit plan is crucial for ensuring the business does not suffer through the change in ownership, and the original owner gets the best value for their exit. Here are the key components of an effective exit plan.

Objectives

What the owner wants for themself and the business must be clearly defined before a strategy can be decided on. Does the owner wish to remain involved in the business but reduce their level of responsibility and liability? Do they want to retire and completely remove themself from the business? Do they even want the business to remain open? Clearly defined objectives for the business and the owner helps narrow down their options for choosing the right exit strategy for them.

Time Considerations

At the very least, planning for an exit from a business should begin 18 to 24 months before the desired exit date. Any exit strategy will come with complex issues that need to be dealt to ensure a seamless transition. These complex issues often take a fair amount of time to overcome. Consideration for the time needed to take care of these issues needs to be given to make sure the owner can exit the business when they want to. The earlier exit planning starts, the more time the owner will have to take care of all of the issues that they need to handle to finalize their exit.

Business Value

If the owner wants the business to remain open and is transferring ownership of the business to another person or entity, then they need to have an accurate valuation of the business to ensure that they are getting appropriate value for the sale of the business. Business owners should hire a business appraisal expert to look at all aspects of the business and provide an objective opinion on what the business is worth.

Exit Strategy

At the core of any exit plan is the specific strategy that the business owner will use to transfer ownership. There are a wide range of strategies that can be used and picking the right strategy for owners and their business is the most important part of an exit plan. Each strategy has pros and cons so careful consideration needs to be given to many different strategies before making a decision. Common exit strategies include:

Liquidation

Closing a business and selling assets to access the equity it has built up is a common exit strategy. In comparison to other strategies, it is a relatively simple exit. Owners can either close their business and sell their assets as quickly as possible, pay off their creditors and keep the rest, or they can liquidate their business over time by taking funds from their business to maintain their lifestyle until the business’ finances have run out. In either case, employees need to be taken into consideration and notified with ample time to find new work, and all legal and financial commitments need to be attended to.

Selling To Someone You Know

If a business owner would like your legacy to live on through your business, then liquidation is not the solution. Selling the business to someone they know is often the first strategy owners consider when they want the business to remain open. Selling the business to someone they know can be a safe option if they trust the person you intend to sell to. It could be a family member, business partner, a friend or one or more members of their management team. Selling to someone who is already involved in the business is advantageous because they may not need as much coaching in running the business.

Selling On The Open Market

If a business owner doesn’t know anyone who they trust with their business or is interested in taking over, they could sell the business on the open market. This strategy can be effective if you negotiate a good price for your business, however finding a buyer that will purchase their business at the appraised market value may take some time.

Selling To Another Business

Other businesses may be interested in acquiring a business. If there is enough interest, a business may be willing to pay a high price for ownership of a business. This exit strategy is good for owners who still want to work in their industry with less responsibility as owners are often offered a position at the purchasing company to remain involved with the business. Careful consideration needs to be given to who the buyer will be as the systems, processes and cultures of both businesses may conflict and lead to complex problems that could negatively impact either business. If a business owner would like business operations to continue using this strategy, it is important to be sure that the purchaser is not buying the business with hostile intentions to shut it down and reduce their competition.

Legal & Tax Considerations

Transferring ownership of a business, or even liquidating it comes with legal and tax implications. Having a clear outline of the legal requirements of exiting a business according to the chosen strategy will ensure that nothing gets forgotten during the exit. Understanding the tax implications for the owner will also need to be considered to make sure the sale of the business provides them with the maximum possible value.

Supporting Material

Having documents and statements that accurately describe the financial and operational history of the business is important to support the valuation of the business and will help when negotiating the sale price of the business. Knowing and outlining which documents you will need to support your negotiations beforehand will help business owners get all materials in order and keep them handy during the process of selling the business.