How to Create a Business Exit Plan (And Why You Should Have One)
According to a recent survey conducted by UBS, 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, an exit plan outlines how you and your stakeholders will get your money back when you close or transition ownership of your business. Moreover, an effective exit strategy gives you more control over the direction of your business and can serve as a blueprint for how you operate day-to-day.
Follow these steps to create an exit plan, so you’re well-positioned for the future.
5 Tips for Starting an Exit Plan for Your Company
1. Identify Your Exit Objectives
You may not know when or how you want to give up control of your business, but you probably have a good idea of what you want to accomplish prior to this point. Your exit plan should include these goals, so you can set a clear path to achieve them.
For example, if you plan to retire someday, you’ll want to make sure you earn enough money from the sale to do so 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 may think you know what your business is worth, it’s usually sound practice to hire a professional business appraiser to obtain 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, so as your business evolves, and industry and market conditions change, you’ll want to make sure you update your appraisal.
3. Set Measurable Goals
Most business owners will tell you their goal is to increase the value of their business over time, but this statement can mean different things to different people. As you’re developing your exit strategy, identify specific ways you plan to increase the value of your business to maximize your return if you choose to sell.
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 hiring more employees. You’re more likely to 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 exit plan will focus on how the business owners — you, your investors and any other stakeholders — exit the business and get their money back. Nevertheless, the two tend to work together.
If you want your business to benefit future generations, succession planning can help you decide whether to keep your business within your family, transition it to key employees, or sell 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 more than once, having a broad idea of when you want to exit your business will help you prepare for its transition. As you near your target, 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 can help you gain a higher return.
Conclusion: Preparing for the Future is Key
Your exit plan may look different as your personal circumstances and business goals evolve and market conditions change. Therefore, it’s important to build enough flexibility into your plan so that you’re not locked in to one approach. It’s also a good idea to update your exit strategy at least annually to ensure that it’s aligned with your long-term objectives.
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.