How to Create a Business Exit Plan
According to a recent survey, two in five business owners plan to exit their businesses in the next five years. Yet, 48 percent have no formal exit strategy in place.
At its core, this type of business plan should outline how you’ll get your money back when you close your business or transition ownership. In addition, an effective exit strategy gives you more control over your business’s direction going forward.
In this post, we’ll further explain the steps you should take to create an exit plan, so you’re well-positioned for the future.
5 Tips for Starting an Exit Plan for Your Business:
1. Identify Your Exit Objectives
Currently, you may not know when or how you want to give up control of your business. However, you should have a clear idea of the goals you want to achieve when the time comes for you to sell or have someone acquire your business.
For example, if you plan to retire someday, make sure you earn enough money from the sale to retire comfortably. Or, you could take your proceeds and invest in a new venture, which will require a minimum payout. Ultimately, your objectives for the business and definition of success will likely be determined by your long-term personal and financial goals.
2. Determine the Business Value
Even if you don’t plan to leave your business for many years, you never know when your plans may change. Understanding your business’s current value will ensure that you’re prepared for any offer that comes along — expected or unexpected.
While you think that your business is worth millions of dollars, you should hire a business appraiser to get an objective and formal valuation. Most business valuations are good for at least a year, according to the National Business Valuation Group. However, a valuation is only valid if the underlying assumptions hold. Therefore, as your business evolves, and industry and market conditions change, you should get an updated appraisal.
3. Set Measurable Goals
Most business owners will tell you that their goal is to increase the value of their business over time, but this statement can mean different things to different people. As you develop your exit strategy, identify ways that you plan to increase the value of your business. This will maximize your return if you choose to sell your business.
Next, set measurable milestones and deadlines to keep yourself on track. These milestones may include increasing your profit margin by a given percentage, introducing new products and services, or growing your management team. Most likely, you’ll accomplish your objectives when you’re held accountable — so make sure they’re realistic and well-documented.
4. Consider Your Succession Plan
Unlike a succession plan, which prepares a business for transition, your business exit strategy will focus on how the small business owners — you, your investors and any other stakeholders — can exit the business and get their money back. Nevertheless, the two tend to work together.
If you want your business to continue in the future, succession planning can help you decide how to handle the next steps. For instance, you can pass down your business to a family member, transfer ownership to key employees, or sell the company to an outside buyer. Your decision will likely determine the structure of the transition, which is your exit strategy. You may need to work with a team of professional advisors to identify an approach that maximizes value while controlling for other costs, like taxes.
5. Create a Timeline
While your timeline is likely to change, having an idea of when you want to exit your business will help you prepare for the transition. As you near your target date, you’ll want to make sure you’re out of debt and not taking on new investors. In addition, it’s often helpful to evaluate the prevailing market environment, as factoring current conditions into your exit strategy may help you gain a higher return.
Conclusion: Understand How the Exit Plan for Your Business Will Work
Your exit plan may look different as your personal circumstances and business goals evolve and market conditions change. Therefore, it’s important to be flexible enough that you’re not set on one approach. In addition, be sure to update your exit strategy at least once a year to ensure that it’s aligned with your long-term objectives.
Has your business created an exit plan? Give us your best tips and tricks in the comment section below!
Editor’s Note: This post was updated for accuracy and comprehensiveness in September 2019.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.