A recent study by the University of Connecticut, over 70% of former business owners regret selling their companies less than a year after the sale.
One of the reasons is lack of preparation on the part of the business owner.
Another study showed that a great deal of business owners spend more time planning their family vacations then they do planning how and when to exit their business. So, what is an exit plan?
A business exit plan is your plan on how to end your involvement with the business you’ve built. When starting a business, you probably are not thinking about selling it. But suppose you decide to leave the company you created. In that case, an exit strategy will enable you to exit the way you want to. This could mean selling the business to a new owner and simply having him/her take over, but it can also be forming a partnership with another business while you step down, or letting the business become acquired and fully operated by another established company. You can even make an exit plan for something as re-branding entirely and shifting the company’s focus.
Business owners should have a clearly defined exit plan to minimize potential losses and maximize profits on their investments. If the business is successful, you will be able to sell it for a profit. Why is it important to have an exit plan?
Knowing the circumstances that cause you to leave the company helps you focus early throughout the business venture. A proper exit strategy will focus on organizing the company’s past to make the upcoming transaction smooth and transparent for all parties involved, managing the present to ensure the business continues performing properly, and considering the future as many different people and connections will be affected by the transition.
A well designed and implemented exit plan enables you to:
- Reduce uncertainty for your family and employees
- Ensure you achieve your business and personal goals
A component of a plan should have a concise statement of your business goals, personal goals, and family/estate goals. - Control how and when you exit
- Maximize company value in good and bad times
Another component of the plan is a business valuation to establish a baseline value for the business. - Minimize or eliminate capital gains taxes
The plan should contain suggestions to minimize any capital gains, ordinary income, and estate taxes related to the exit. - Removes emotions
An exit plan removes emotions from the decision-making process. Having a point at which to exit or sell the business helps avoid panic selling or making rushed decisions when emotions are high. - Handle unexpected events
Life happens. Unexpected events are part of that. Therefore, it’s essential to have an exit strategy when things don’t go to plan. For instance, what happens to the business if the owner faces an unexpected illness? What happens if the company loses a key supplier or customer? These situations need planning in advance. - Cover succession planning
An exit plan specifies what happens to the business when key personnel leave. For instance, an exit strategy might stipulate through a succession plan that the company passes to another family member. Carefully detailed succession planning of an exit strategy can help avoid potential conflict when a business owner wants to or has to depart. - Exit a failing business
This usually involves liquidation or bankruptcy. Liquidation consists of closing down the business and selling off all its assets, with any leftover cash going toward paying off debts and distributions to shareholders/investors.
There are six main steps to consider when creating an exit plan
1. Financial Organization
If you have all of your business’s financial information and records properly organized (dataroom), your transaction will be a lot easier, regardless of how you’re stepping away from the business. Keeping 5 years of financial data is a good start, but, in this case, there’s no such thing as too much data.
2. Decide how to Exit
The first step in a successful business succession planning process is to look at the available options and decide which one best suits your needs.
To name a few :
- Passing the business to a family member you trust
- Transfer ownership through a management or employee buyout
- Selling the business to a 3rd party (competitor, investor,…)
- Liquidation
3. Transfer Leadership Responsibilities
In preparation of this, promoting one or more top employees, moving them closer to you, would be a good start. You need to start preparing a new leadership team to ensure that your responsibilities are covered during the transaction, and to ensure the buyer that they’re acquiring a team that can handle itself.
4. Inform your Employees
Your employees are the backbone of your company. You can’t operate it by yourself, and without them, you’d have never gotten where you are. The sale of the company might impact their lives dramatically.
Let your employees know you’re leaving and how it will affect them. Be honest. They deserve it. They also deserve time to make decisions to secure their own futures.
5. Inform you Customers
Your customers have likely been relying on your products or services. Let them know you’re leaving. Introduce your customers to the new owner and ensure that your legacy of providing good service is in good hands.
6. Tell your Business Contacts
Reach out to your suppliers and alike and inform your business contacts that you’ll be exiting the business, and if there is any part of the deal that affects them, you might need to let them know.
An exit strategy is an essential part of your business plan. From the very start of your business venture, you should know how you plan to leave it.
Sticking to your exit plan is just as important as having one. After all, exiting your business is probably going to be the most important deal of your life.