4 Reasons Every Business Owner Needs an Exit Plan
If you ask a group of business owners for a show of hands of who thinks an exit plan is important, everyone’s hand will go up. But if you ask the same group what an exit plan is, almost everyone will look at you with a blank stare. Most owners do not know. So, what is an exit plan, and why will having one usually increase your net worth when it’s time for your exit payday?
What Is An Exit Plan?
A well-thought-out exit plan will address strategic questions such as:
The process to develop the plan, which we explore in depth here, is more important than the end product. Why? Because when done properly, the planning process will help you answer the above questions, expand your view of possibilities, craft a viable game plan and increase your net worth.
1. Exit Plans Clarify & Define Your End Goals
If you don't know your destination, how can you successfully arrive? Crafting your exit plan is critical in plotting your course. It offers a blueprint of how to convert business value into personal wealth so you can enter the next chapter of your life on your terms and timetable with peace of mind.
For most business owners, when to sell and who to sell to are significant decisions and require time to soul-search. Transferring ownership of a closely held business may affect many people, including family members, employees, suppliers and the local community. The exit planning process should continuously clarify the stakeholders’ goals, desires and intentions. It should crystallize the owner's vision for the business, their desired involvement during the transition and the leadership of the company moving forward. An end goal produces tangible next steps.
2. Exit Plans Expand Your View of Possibilities
There may be many potential ways to monetize business interests, so different exit pathways should be evaluated. Maybe the company is large enough to warrant a potential investment from a private equity group or family office that would provide the opportunity for two liquidity events. Maybe forming an ESOP trust fits best with the owner’s desires. Or perhaps retaining control and instituting incentives for others to run the company is the best option for a few years.
To help owners make those decisions, the exit planning process must involve assessing the business and its opportunities. The company’s value drivers should be evaluated to highlight the strengths and opportunities as well as identify potential weaknesses and threats that will inevitably come up during the selling and due diligence processes. The current market valuation for the business should be estimated for different types of transactions and buyers since the selling price for a sale to a strategic buyer may differ from the price for a financial buyer or internal sale. An experienced M&A advisor will walk you through the various exit plan options, offer qualified recommendations that best fit you and your company, and support you through the entire M&A process.
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3. Exit Plans Produce a Viable Path to Leave on Your Terms
The best case scenario would mean that your business is already positioned perfectly for you to implement your exit plan on the day you’re ready to transition. Though best case scenarios are rarely real case scenarios, exit planning as early as you can offers you greater flexibility to exit on your terms when the day comes.
Exit plans should be implemented while the business and opportunities are being assessed but finished after, since the choice of which exit pathway to pursue and the estimated selling price will both influence the members on the advisory team. Your desired outcome will impact your timeframe, benchmarks and actionable steps.
For example, if the likely pathway is a sale to a third party, then the services of an investment banker or broker are needed. If the transition will be to family members, then the services of a family business coach may be needed. The advisory team will most likely include a business planning or transaction attorney, a CPA and the owner’s financial planner.
Furthermore, business continuity plans should be reviewed or developed in relation to the exit plan to help safeguard against unforeseen events, such as the death or disability of a stakeholder. Determine a Plan B — such as bringing on an investor, forming an ESOP or retaining control — to approach the primary exit pathway from a position of strength and avoid scrambling, should an obstacle appear.
4. Exit Plans Can Increase Your Net Worth
Exit plans can prepare your company to sell for an above-market price. They provide actionable steps and measurable KPIs that keep you focused on your end goals and position you well in front of potential buyers. In fact, many exit plans span years in order to implement value enhancement strategies and/or prepare successors.
Because the advisory team may include multiple players, especially if the exit plan integrates with an estate plan or financial plan, it’s important for someone to be the "quarterback" to develop action plans and assign responsibilities and due dates. The team should meet with the stakeholders periodically to clarify or refine the objectives and keep the plan on track.
Final Thoughts
Developing and putting into action an exit plan sounds like a lot of work, and it can be. However, you only get to sell your company once, so crafting a plan is essential to get you more money for your investment and hard work. The planning process should be fun and energizing while providing you with peace of mind.