What are the best practices for developing an exit strategy?

Start with a Valuation. You have to know where you are, before you know where you are going. Often business owners do not understand the value of their business or are using a rule of thumb that is out of date or does not relate to their business.

Business owners and exit strategies, it’s a subject very close to our hearts @ascentfinancialplanning and something we regularly advise clients on. Financial planners are ideally placed to offer advice in this area, far more so than Accountants and Solicitors, who do have limited roles to play in the process. The aims a business owner may have for his/her business may be wholly different than their personal retirement goals, alternatively, they maybe inextricably linked. Either way it pays to put in place a personal or family cash flow plan well in advance of even thinking about selling, Such a plan would also incorporate a tax efficient exit strategy, documented accordingly.

Great question and great answer… If I may I would and one other points… one what is your current and/or future “personal energy” visa vi the demands of your business both currently and in the short/medium term. Your ability to maintain the pace will reflect in the continued success of the business and therefore be reflected in the value of the business to others

Identifying your exit goals are the most important thing a business owner can do when build an exit strategy. This process must start with identifying your 'freedom point'. In short, this is what you you need to sell your business for to fund your ideal lifestyle. Once we know your freedom point number, we can back into the estimated revenue, EBITDA, and multiple needed to achieve your exit vision. Not understanding your freedom point will impact your business strategy, growth plan, and entire business model. If we don't know the size of business we need to build, it's impossible to truly achieve your ideal goals and exit strategy! Building a $1MM business requires different strategies than a $20MM business. Start with your Freedom Point.

The most challenging decision for any business owner is to accept that s/he can only work for a limited time. It also happens to be the most important. Once that gets done, then fixing the what-how-when becomes easy. In my experience, owners delay the decision to exit because they hope their children will take over one day, even though the next generation may not be inclined or capable of taking over. I have seen businesses lose value because the owners kept waiting for the next generation to take over. I have also seen the next generation inheriting bankrupt companies and dealing with numerous legal challenges because the (founder) owners were so attached to the business that they could not exit when it was time.

Most owners would like to hand the business over to the next generation. That transition is easier to implement. However, if that is not possible, then it's best to explore other options, like selling to a third party, eg a large customer, or a competitor, who will be likely to pay a premium. It is likely that the exit will bring maximum dollar value to the owners. It then follows that one should invest in appointing the right professional advisor. Instead of spending time bargaining fees, the business owner should assess whether the firm has relevant technical and industry expertise and is well-connected with the industry constituents. Investment in the right partners will help get maximum value for the business.

Definitely seek legal counsel will be my first advice as laws vary State to State, however, if you’re a partnership or multi member LLC consider key man’s insurance (insurance on partner in the event of untimely death). Oftentimes it’s not possible for business to be continued by our heirs (for one reason or another but if we’ve identified a key Executive that can take our business to next level we can offer that individual stock options as well as possibly Deferred Compensation to incentivize them to grow with the business).

The second step is to evaluate your exit options, which can range from selling to a third party, transferring ownership to family or key employees, or liquidating the business. Each choice has its own advantages and drawbacks, influenced by your goals, market conditions, business value, and tax implications. Consulting with professional advisors like accountants, lawyers, or business brokers is crucial to weigh these factors and select the most suitable exit strategy for your specific situation.

If you have a saleable business, target selling it to a third party. Assuming, hoping or praying that your family will want it is a dangerous strategy. If this is a legitimate option, then it’s best to have this conversation, early and often, because their life or career goals are likely to change. Additionally, selling to a third party can be less risky. Family members usually benefit from preferential payment options that leave you totally reliant on their performance and risk destroying relationships if they don’t succeed. Although, earn-outs are common in third party sales, they usually have some form of collateral attached that offer some protection.

Unless you are a serial entrepreneur, you are going to want an industry professional's support on this. They will remind you of possibilities you might otherwise be unaware are options. Just like your employees care about more than their paycheck (PTO, 401k matching, or comprehensive health coverage), you should be thinking BIGGER than just the purchase price.

Depending on the exit route you have determined is right for you, depends on the timescale required to successfully achieve this. Exiting successfully easily takes 12 months, but often 24-36months. Therefore planning for this early is crucial. WHO is going to do what you do? WHEN are you going to help them to do so? HOW will you monitor and determine their effectiveness at doing so, that it doesn't have a detrimental impact on the exit value or time?

Most business owners are great at building solid businesses but need to improve in bookkeeping and investing in a robust financial reporting system. Small businesses rely more on informal communication channels, which become a roadblock while executing an exit plan. It takes 18 to 24 months to execute an exit plan. The business owner can use this period to: - streamline financial reporting - address pending regulatory and audit issues - ensure that credit records with banks and lenders are clean - streamline the operating cycle - collect or write off any old uncollected receivables - establish or re-affirm solid market standing - ensure that any new business, product, or geography does not unduly add to the business risk.

The third step is to plan ahead, preparing your business for a smooth exit. Actions will vary based on your chosen exit route but could include improving financial records, streamlining operations, diversifying the customer base, or upskilling staff. Creating a timeline with milestones and deadlines is crucial for keeping the exit process on track. This proactive approach makes your business more appealing to potential buyers or successors and ensures you meet your exit objectives.

Preparing the business for sale the day you start, certainly reduces stress and makes the process easier. If you haven’t, then be prepared to spend the next 2-3yrs doing so. Let’s be honest, when most entrepreneurs think about exiting, they’ve had enough and want out now. If their business isn’t already set up to run independently of the owner with processes, financials and staff in place, there’s usually no energy left to start this heavy lifting. They’re emotional and mentally done! Do yourself a favour start this planning long before you’ve seriously start contemplating your exit.

A key element in planning to exit a business is to put yourself in the shoes of a potential acquirer doing due diligence on your business. Are all of your processes and systems documented, are all your compliance requirements in place, do you have appropriate licences for all software, do you have an up to date operations manual, are your HR practices state of the art, and do you have accessible copies of all contracts and agreements that the business relies upon in its day to day operations.

Communication is key to the smooth implementation of any exit plan. I have worked with businesses where the co-owners were not aligned on the exit plan. While we, as their financial advisors, had started working on a sale to third-party strategy, the other partner was independently looking at liquidating the business to unlock the value of the land it had. After we did some research, we realized that there were regulatory restrictions on selling the land. It later transpired that the other partner was unwilling to sell. The transaction did not go through.

Keep all conversations about your exit or sale plans to yourself and your trusted advisors such your lawyer and CPA. Speaking too early risks destroying employee moral or create angst as they wonder about their future, etc. People don’t like uncertainty. Given that the sales process can take 1-2 years once listed, a lot can happen in between. Deals fall apart all the time and communicating before it’s finalized can damage employee confidence. Also, secrets are hard to keep. Competitors might use this period of distraction to attract your customers. It’s best to keep quiet until you have a deal.

I would caution on the timing and staging of any communication in respect of a planned exit. You want to avoid spooking key employees into leaving due to fear of the unknown. This can and does occur, if owner's intentions are communicated, before plans have any clarity.

Instead of reiterating the importance of communication with all aspects and stakeholders during this transition, I'm going to remind you of one important milestone this transition needs to survive to get the biggest bang for your buck: The Indemnity Period This is usually 10-30% of the purchase price held for any indemnity or fraud claims made by the buyer once they own the business. This period lasts anywhere from 6 months to 36 months depending on the size of the business. Don't give them ANY reason to claw that money back from escrow!

The aim is to get the best deal; the art lies in balancing firmness with flexibility. Logic and reasoning will lead to an emotional decision. Don’t get stuck on a single potential agreement. Have alternatives. You can often strengthen your position if you're willing to walk away. Negotiations aren't just about numbers and terms. They are mind games. Be prepared mentally. Don't be offended by lowball offers or criticism. While your business is personal, don't take things personally. Know your numbers better than your accountant or attorney. In negotiations, as with sales, the first to speak loses. Let potential buyers make the first move or fill silences. It's a powerful tool to gain insight into their thoughts.

If you are strongly emotionally attached to your business, it may pay to engage a skilled negotiator, to conduct the initial negotiations. This is more important if the business has significant value.

Get your business professionally evaluated. The benefits far outweigh any downside. A legitimate evaluation gives the confidence when entering into negotiations of the value of your business. Owners are notorious for having exaggerated valuations of their businesses, hence they never sell. Once in possession of your valuation, set your asking price and determine what the lowest price you’ll take, as well as acceptable conditions. Doing so in the heat of negotiations, risks making emotional decisions. Being fully prepared allow you to be decisive during negotiations because you know your boundaries.

By this point in the deal, you should already know your key objectives and things you will be more flexible on. You should also have legal representation by now. I have seen more deals walk because the selling owner is too involved, too pushy, too boastful that it scares the buyer off. Let your attorney be your gatekeeper and keep your two cents between the two of you. Remember, the one that talks first, loses!

Implement smoothly but also quickly. Deals regularly fall apart between the time an agreement is reached and executing the paperwork. This is usually a case of buyer’s remorse, so don’t delay. Depending on your business, I strongly recommend that you embark on a campaign to visit all your customers and introduce the new owner. As most sales require a transition period for the previous owner, these visits allow you to let them know that your still around. These visits are also somewhat self serving. By ensuring a solid hand off to the new owner, increases your odds of getting your earn out.

This is an important post. The thing that keeps coming to mind is this - Leave with integrity. In every aspect of the departure, do it with honor. Your good name and reputation matters.

I recently had the pleasure to interview Mike Finger who focuses on the small business exit. He shared that roughly 80% of businesses go unsold. Considering most of us have our wealth tied up in our businesses, this is concerning. As I followed up on this, he raised 3 key points: 1. Are your results attractive to buyers? 2. Can they be replicated by a buyer? 3. Can you effectively document your results? The exit doesn't have to be a "lost cause." Keep the focus simple, but keep your focus on the exit.

While all owners should be confident about their business, I have noticed there is a tendency to inflate the value of the business. A value is notionally derived based on recent transactions that have been done. What gets overlooked is that the other company might have had a unique proposition that was able to get a premium. It is good to be realistic and in tune with the market. Most of the time business owners are the best judges of the value of their business. It is advisable to go with that judgment, rather than get swayed by inflated valuations promised by investment banks.

Start (from where you are at) with the end in mind. In this case, that means what simple steps can I take every day from now on to make the business sellable. Then take them. This is part of what they mean when they say working on the business and not in it. There are a host of different things, but if I had to start somewhere it would be by 1. Figuring out who is likely to buy and 2. Asking them what would make my business attractive And then build your plans around those answers. It might be systems and processes, or tier two management, or an automated client generation system, or good financials. Whatever the answers, that’s your starting point. And then repeat in detail and regularly.

In most cases, business owners should be considering their 'exit strategy' as their 'business strategy'. Exiting, exit planning, or succession planning does not necessarily mean you're looking to sell your business today. It can simply mean you're building a business to be 'exit-ready'. It's a strategy to reduce risk and owner dependency in the business today, while creating substantial value for the future. An exit-ready business is tied directly to 'business owner freedom'. Successful exit-ready business owners are focused on personal freedom, financial freedom, and business freedom while building an exit strategy.

For my own view, most of small business have more other goals to pursue and still want to maintain there businesses while promoting that but they lack the balancing and one fall for another in the name of pursuing the other goals. So the existing strategy should workout base on shares or owning ROI with someone that have same dream of the business you are doing. It'll strengthen you and ease you in pursuing other goals of yours.