Exit Planning for Your Business
What is Exit Planning?
Exit planning is a strategy to leave your business when you want, in the way you want, for the amount you want.
With a solid exit plan, you’re more likely to maximize the value of your business and meet both your personal and professional goals down the road. A well-thought-out exit plan can also allow you to reduce or delay the total taxes you owe and keep more money in your wallet.
And depending upon your circumstances, an experienced small business financial advisor may be able to help you avoid taxes altogether if you qualify for the Qualified Small Business Stock (QSBS) exemption permitted by Section 1202 of the Internal Revenue Code.
Who is Exit Planning For?
If you own a business, an exit plan is a necessity rather than an option. This holds true even if you don’t plan to leave it in the next 5, 10, 15, or even 20 years.
By planning for an exit well in advance, you won’t have to adjust your business operations at the last minute or scramble to gain control of the situation. Most importantly, you’ll increase your chances of parting with your organization on good terms and at a fair price.
No matter how full your plate is today, don’t let these common excuses and misconceptions keep you from starting your exit plan right away:
You’re Too Busy: With daily business demands, it can be easy to ignore an issue that you believe is years down the road.
Exit Planning is Complex: If your business is your primary or sole source of income and wealth, you might assume exit planning can be costly and challenging.
You Don’t Have the Support: While you know of many resources to help you start and grow a business, you might not be aware of financial advisors and other professionals who specialize in exit planning.
You Want to Wait: You may believe that it’s safe to wait until a few years before you are ready to exit.
Understand that the earlier you plan your exit, the greater control you’ll have over its outcome. Therefore, you don’t want to prolong the process and later find yourself in a scenario where your exit is very different from what you envisioned.
Ideally, you’d pursue exit planning at least three to five years before you hope to leave your organization.
Succession Planning vs. Exit Planning
While the terms succession planning and exit planning often get used interchangeably, there are noteworthy differences between them.
According to the Exit Planning Institute (EPI), an exit plan focuses on all of the business, personal, financial, legal, and tax aspects that come with the transition of a private business. Its main goals are to increase the value of the business at the time of exit, reduce taxes and ensure the owner(s) can achieve their goals in the process.
Succession planning, however, is a specific type of exit strategy. Its purpose is to ensure a business continues once the owner moves on. Generally speaking, succession plans are created for family businesses that involve multiple generations or those that plan to transfer ownership to employees.
Types of Exit Strategies
There are a number of exit strategies you can pursue. Your ideal exit strategy will depend on a number of factors such as your business size and future goals. Here’s an overview of the most common types you may encounter.
Merger
A merger occurs when two businesses combine into a single entity. If you go this route, you’ll often retain an executive role as the owner, co-owner or manager of the combined business for at least a pre-defined period of time to ensure a smooth transition. Therefore, a merger often isn’t your ideal exit if you hope to completely cut ties with your business upon the consummation of the deal. The five types of mergers include:
Horizontal: The two businesses are in the same industry.
Vertical: Both businesses involve the same supply chain.
Conglomerate: The two businesses are unrelated.
Product Extension: Both businesses sell compatible products.
Market Extension: The two businesses sell related products in different markets.
Acquisition
In an acquisition, one business buys another. If your business gets acquired, you essentially give up ownership of it. The upside is you may be able to maximize your sales price if multiple competitors show interest and try to outbid each other.
Ideally, you’ll want a friendly acquisition where you agree to be acquired by the business. Sometimes, however, a hostile acquisition could arise if you don’t have voting control of your business or points of contention emerge among your board, investors or lenders.
A Sale to Someone You Know
There are a number of individuals you may want to sell your business to. Friends, family members, and employees are just a few examples.
If you pursue this option, be careful as it can take a toll on your relationship. To keep your relationship in good standing, don’t hide anything and make sure the individual is aware of and signs off on your liabilities, profits, and other important metrics.
Initial Public Offering
The first sale of a privately held company’s stock to the public is known as an initial public offering or IPO. With an IPO, you’ll need to find investors, gather important financial documents, register with the Securities and Exchange Commission (SEC), and determine a stock price and value for your business.
Very few privately-held companies will ever have an IPO and become publicly traded, so it’s unlikely you’ll experience this type of an exit, but it’s certainly exciting if you do!
Of course, just because your company goes public, doesn’t mean you won’t be expected to show up to work the next day. In fact, you may find yourself working longer hours to represent the organization with the media and investors, in addition to maintaining executive responsibilities.
Liquidation
Liquidation is when you sell all of your assets to close your business for good. If other strategies don’t work for you, this may be the path to take. You won’t need to negotiate or merge your business because all of your assets will be distributed to your creditors and investors.
The caveat with liquidation is that it could cause you to lose the intellectual property and value created by the business, not to mention potential risks to your reputation and tension with your customers.
How to Develop an Exit Plan
Before you develop an exit plan, consider how long you’d like to remain involved with your business as well as thinking about your own personal and financial goals. Then, follow these steps.
Prepare Financial Documents
You won’t be able to exit your business properly until you have an accurate account of your personal finances. So you’ll want to gather and verify a number of financial documents. These may include but are not limited to cash flow statements, balance sheets, bank statements, and tax returns.
Discover the Type of Business Owner You Are
Once you know what type of business owner you are, you’ll find it easier to choose the right business exit strategy. Chances are you’ll fall into one of these four categories:
Rich and Ready to Go: Your finances are in good shape and you look forward to the next chapter in your life. You have minimal to no concerns about your financial situation once you leave your business.
Wealthy, But Love to Work: You are financially secure. However, you enjoy work and don’t see yourself fully retiring. Working, at least on a part-time or occasional basis, will bring you the most satisfaction.
Stay and Grow: You know you’re not financially ready to leave your business. You’re prepared to continue to work and increase the value of your organization as well as your net worth.
Get Me Out Now: While you know your business requires more work to do before you can leave with confidence and security, you’re mentally exhausted and ready to move on anyway.
Evaluate Exit Strategies
Review all of the exit strategies at your disposal to figure out the ideal options for your unique business and future goals. Be sure to weigh the pros and cons of each strategy and collaborate with a professional so that you can make the most informed decision for your situation.
Communicate with Investors
Keep your investors in the loop about your exit plan. Let them know that you will design a strategy that explains how your exit will affect them as well as how they’ll be repaid. Answer any questions or address any concerns they may have.
Decide on the New Leadership Team
Depending on the exit strategy you select, you’ll need to pick a new leadership team. It’s a good idea to begin to transfer some of your duties while you work on your plan. This way you can guide the leaders with their transition and ensure they’re confident enough to take cover.
Educate Employees
Once you finalize your exit plan, inform your employees. Be transparent about why you plan to exit the business and what they can expect going forward. Anticipate many questions and answer each of them thoroughly. Do this far in advance so that your employees have time to figure out where their careers will take them next.
Tell Customers
Last but not least, share the news with your customers via email, phone, and/or social media. Introduce the new owner to your customers. In the event you plan to close, provide your customers with alternative solutions.
Business Exit Strategy Tips
Not every business exit strategy is created equal. To ensure yours leads to a seamless and lucrative exit, be sure to follow these tips.
Have a Clear Vision
While you may know that you want to move on from your business, your future plans might be up in the air. Take the time to figure out why you’re ready to go a different direction. Maybe you’d like to take care of family or health issues. Or perhaps you feel burnt out and would like to retire.
A clear vision of why you’d like to leave your business will motivate you to focus on the most important parts of your exit strategy and implement it effectively.
Create a Financial Plan
Chances are you’d like to exit your business without worrying about finances. If this is the case, determine the type of lifestyle you hope to lead. Then, do the math and figure out the numbers that will allow you to not only create it but sustain it as well.
It’s in your best interest to work with financial advisors and professionals who specialize in exit planning. Once you have a financial plan in place, you’ll need to ensure your exit plan caters to it.
Maximize Your Business Value
In a perfect world, you’d sell your business for as much as possible. The reality, however, is that this is easier said than done. You don’t want to overestimate the value of your business but you also don’t want to underestimate its growth potential.
Fortunately, you can maximize your business value through several strategies. You may consider adding new products or services to your lineup, for example. Or perhaps you’re able to expand your target audience, strengthen your brand and increase your revenue.
Consequences of No Exit Plan
If you don’t develop an exit plan, you’ll likely put yourself in a difficult situation when you’re ready to move on from your business. Several of the most common consequences of not having an exit plan include:
Low Sale Price: You may sell your business for far less than its worth or less than you need to have a financially comfortable post-exit life.
Personal and Family Hardship: Your family may suffer, especially if you are the sole or primary breadwinner and you’re unable to provide them with the lifestyle they’re used to.
Hefty Tax Bill: You may be on the hook for a tax bill that significantly reduces the amount of money you actually end with.
Lack of Control: You may have to pursue an exit strategy that isn’t necessarily ideal for your personal and financial goals.
Poor Culture: If you’ve worked hard to build a positive business culture, a sudden or poorly thought-out exit plan can destroy it.
Employee Departure: Your most valuable employees may leave your organization if your exit plan impairs their position or career aspirations.
Forced Liquidation: You may have no other option but to liquidate your business for the value of your assets.
The Bottom Line
With a strategic exit plan for your business, you’ll reduce your risks and increase the likelihood you’ll be able to leave on your own terms and conditions, financially content and proud of all you’ve accomplished. You’ll also leave your business behind in a way that benefits your employees, investors, and customers.
Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. Before making major financial decisions, please speak with us or another qualified professional for guidance. The original version of this article first appeared on Wealthtender written by Anna Baluch.
