Exiting Your Business - The Value of Having a Plan Now
One of the most important plans you can make is figuring out what will happen to the business when you eventually step away. Even if that day will not be for many years in the future, here's why determining your exit strategy now can put yourself and your company in a stronger position.
When you’re feeling the thrill of managing and growing your business, it's hard to imagine ever doing anything else. But one of the most important plans you can make is figuring out what will happen to the business when you eventually step away. Even if that day will not be for many years in the future, here’s why determining your exit strategy now can put yourself and your company in a stronger position.
What Is a Business Exit Strategy?
An exit strategy lays out your plan for how you would eventually like to leave your business. It’s like a business plan but instead of covering the ongoing management and growth strategies for your company, it describes the plan for transitioning you out. Some points it would cover include:
When you plan on exiting a business.
What you would like to happen to the business.
Who would take over.
The target sales value you’d receive as part of your exit.
Why Is it Important to Have an Exit Strategy?
While planning to leave something you care about so much might feel strange, it ensures the continued success of your business. Your exit strategy isn’t a plan to fail and quit, but rather how you could leave in a way that best supports your personal financial goals, your business, and your employees.
Part of exiting a business involves getting the company ready to run without you. By having these instructions in-place, it helps prepare in-case something unexpected happens to you where you’re no longer able to run the company.
An exit strategy also gives you goals and a timeline for scaling up your business. That way when you do walk away, you’ll receive a larger payout to fund your retirement or other ventures. You could also communicate the exit strategy with your top employees, especially if you think they would take over. That could increase their loyalty as they know what to expect for the future.
How Could You Exit Your Business?
There are a few strategies for exiting a business, each with different pros and cons:
Sell or merge with another company – If you have other large competitors in the area, they may be interested in taking over your business as part of a sale or merger. The sales process can be time consuming and expensive. Not every business owner is able to sell either. But if it works out, this can lead to the largest payout for your exit.
Transfer to family members – Many business owners dream of leaving their company to their children and other family members. If that’s yours, make sure that your family members are interested in taking over one day, and that they’re actively involved in working for the company so they learn how to run things.
A management/employee buyout – Your management team and top employees may also be interested in buying the company from you. By discussing this strategy with them now, you can keep them loyal and working hard to grow your business, since they know it will be their own one day.
Sell to other business partners – If you have other business partners, you might all have different timelines for how long you want to keep working. Together, you should discuss potential buyout plans in-case you or another partner wants to leave while the others do not.
Wind down the business – A wind down shuts down your business. You sell your remaining assets, pay of any remaining debts, and keep whatever is left over. It’s the simplest way to exit, but not as lucrative as the others while also ending the business. By planning ahead, you could improve your chances of using the other exit strategies.
What Should You Have in Place Before Exiting a Business?
Well-prepared financial statements – Potential buyers will want to closely examine the financial statements of your business to see how it’s performing. Make sure your bookkeeping is accurate and there aren’t any problems you need to clean up, like your system doesn't always properly track and categorize business expenses.
Evidence of strong past sales and growth – To increase the sales value of your business, do what you can to maximize revenues, cash flow, and profits during the years leading up to your exit. By having a target exit date, you can figure out when it’s most important to maximize growth.
Commitments from key employees – If your company depends on any top employees, see if you can get contract from them as well to stay on after you leave. This could include financial incentives, like bonuses for staying after you sell or the chance to be part of a buyout.
Business processes that don’t depend on you – You should set up your business so it can run without you. If things start to struggle when you go on vacation, you need to rethink the processes so they are less centered on your leadership.
What Are the Best Practices for Exiting a Business Successfully?
Get a professional valuation – In your mind, you might have an idea for how much your business is worth, but it could be far off the market value. By hiring a business appraiser, you can get a professional opinion to guide your negotiations, and to get ideas for how to increase your value.
Consider how you’d like to exit – Start thinking of which of the exit strategies you’d like to use so you can prepare. For example, if you’d like to transfer to a family member or to employees, begin giving them more responsibility now rather than right before you leave.
Decide if you’d like to stay involved – When you exit the business, would you like to stop working completely or would you be willing to work part-time for a stretch? This could be a requirement as part of a deal, like a potential buyer wants you to stay on for a few years after an acquisition.
Communicate with the involved parties – As you approach your exit timeline, be sure to communicate the plan with your partners and investors. Once the deal is in-place, you should also let your employees and customers know what to expect.
Start early – The earlier you start thinking of your exit strategy, the more time you’ll have to set the stage for a successful result.
Of course, the best way to set a successful exit is by having a successful business to hand off. The hard work you’re putting in now will hopefully lead to a large payout in the future. For more advice on how to keep growing your business, check out the other articles on the Roll by ADP blog.