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Exit Strategies: Why All Business Owners Should Have One

May 25, 2022
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When we build a business, it often becomes an extension of ourselves. We put our heart and soul into building our businesses from the ground up. However, as time goes on many people change their priorities or want something different out of life. 

On average, a recent study found that business owners have approximately 80% of their net worth tied up in their companies. Therefore, every business should have a thorough and well-planned exit strategy that accounts for a multitude of situations. This does not mean you are lacking confidence in the future of your company, in fact, it demonstrates the thoughtful planning that made your business a success in the first place. 

A Brief Look:

  • What is exit strategy planning?
  • Why do you need an exit strategy?  
  • What are the first steps in formulating an exit strategy? 

What Is Exit Strategy Planning?

Essentially, business exit planning is the process of strategizing your freedom from ownership of your business. Ideally, a business exit strategy is developed at the conception of the business and often influences major decisions. However, a recent report found that an overwhelming majority of business owners (94%) do not have a formal exit strategy in place. A plan for how and when to exit your business should be developed early and reviewed frequently against growth, market trends, and strategy changes. 

The best type of exit strategy will depend on a variety of factors (timing, valuation, personal choice), and exit strategies fall into two categories: internal and external. 

  1. Internal: partners, family, management team, employees 
  2. External: industry trends, market conditions, buyer pool, strategic relationships, recapitalization / IPO / liquidation options

Reasons Why You Should Have An Exit Plan

Because owning a business can be a taxing endeavor, exit planning can be a sensitive subject for business owners. However, you may lose out on opportunities by avoiding the inevitable. Owners without exit strategies could encounter financial and legal repercussions or even significant tax bills. In some instances, they can wind up with less than half of the purchase price in the bank after all taxes are paid without careful planning. Planned exits are a lot more favorable than unforeseen ones.

  • There will come a moment when personal time takes precedence, and exit strategy planning will help you be prepared for that. You’ll gain personal freedom from day-to-day activities of the business by exiting. 
  • Depending on the type of strategy you choose, you may preserve your legacy by sharing the responsibility and rewards of ownership with family members or key employees.
  • With an exit strategy, you can monetize value that is held in the company for a multitude of reasons. For example, if you set out on a more lucrative business venture, you can quickly liquidate your current situation. Alternatively, if you find yourself in a situation where you need to raise money quickly, an exit strategy can help.
  • Whether you decide to liquidate or transfer ownership, exiting your business can be a complicated and time-consuming process. With an exit strategy in place, you can reduce transaction time when it comes time to exit officially. Effective exit strategies outline all roles and responsibilities within a business. With every stakeholder and employee informed, transitions will be smooth and anticipated.

What are the first steps in exit strategy planning?

Developing a business plan exit strategy is a multi-faceted process that requires expertise and nuance. A strong exit strategy takes into account all major stakeholders, finances and operations and outlines all necessary actions to sell or close. They may vary by business type and size, but the best exit strategies exemplify the true value of a business and provide a foundation for future goals and new direction. Thus, it is best to consult with a team that has a proven track record of thorough business valuation and successful transactions. Though the steps can vary, exit strategy planning follows a general framework.

1. Set time-restrained goals for exit

The first step when you are looking into how to develop an exit strategy is to determine your personal goals and goals for the business with explicit expiration dates. 

Hence, it is recommended that you make your exit goals both actionable and achievable. Communicate your goals with key stakeholders, partners, and family members. 

Consider:

  • When do you want to exit your business? 
  • Will your exit be determined by time, finances, and/or market value? 
  • Who are the people that need to know about your exit timeline goals? 
  • How will you tell them? 

2. Assemble your exit planning team

Next, a business owner should compile a team of advisors. Expertise of third-party advisors helps make your transaction fast and effective, maximizes the value of your business, and smooths transition periods. Your exit planning team, ideally comprised of tax specialists, a business accountant, an attorney, wealth manager and an M&A advisory firm, should meet regularly to discuss progress, alterations, and updates to your exit strategy. 

Consider: 

  • Who can you trust to advise you through this process? 
  • Do your advisors have expertise in the type of exit strategy you are considering? 
  • Are you advisors both objective and experienced? 

3. Determine what you need financially from your exit 

Owners should then consider what they need financially from their exit to help them achieve their personal financial goals for retirement or post-exit life. This may mean, for some, that work becomes a choice instead of a necessity. Assess how much of your earnings as an owner subsidizes different aspects of your lifestyle. You may need to build wealth outside of the business as relying on the sale of the business alone is rarely a sound retirement strategy. 

Consider: 

  • What aspects of my business fund my personal lifestyle? 
  • When I exit my business, do I need additional income? 
  • What exactly do I need financially to comfortably exit my business? 

4. Work with your advisory team on the best type of exit strategy for you:

Once you have a better understanding of your financial needs, you can consult with your advisors to determine the best strategy for you. Whether you decide on an internal or external exit strategy, you should consider personal preference, the feasibility of each method, and if your exit will allow you to achieve your predetermined financial goals. 

Furthermore, in order to pick the best exit strategy for your business, your advisory team should help determine the value of your business. A proper business valuation process goes well beyond the financial valuation of the organization. Owners and their advisory must evaluate intangible assets like legacy, company culture, intellectual property, company brand and values, strategies, social capital, relationships and more. These items factor into the exit strategy and can often affect the final sale price and terms.

Consider: 

  • What things did I create with my own intellect and contribute to my organization? 
  • Are there valuable relationships that my advisory team should know about? 
  • What makes my company especially unique? 
  • Do I want to keep the company in the hands of family, employees, or key stakeholders? Or is there more value in selling? 

Who Can Help You With Exit Planning?

Building a business can take a lifetime. Therefore, any sort of exit planning should be handled in a delicate, meticulous, and professional manner. If you are looking to move on from a chapter in your life, you should ensure that you are ready to leave on your terms, with the right value (price, terms, and fit) for your years of hard work. 

There are some professionals that will be able to work with you on different parts of your exit strategy. Your CPA, tax specialist, attorney, accountants, and wealth managers will all be able to provide valuable insight. However, the best guidance you can receive will come directly from a team that knows all the nuances and fundamentals of M&A exit strategies.


Persient Mergers and Acquisitions (M&A) Advisory Firm

The Persient team has spent decades working in various industries such as manufacturing, business services, technology, healthcare, media & marketing, and specialty services and products across a variety of change-of-control transactions. Together, they make up Persient, a group dedicated to exceptional client care and helping business owners in San Diego, Orange County, and around the United States prepare for their business plan exit strategy. Persient’s values consist of high standards, deeper insights, and getting the best results for your exit plan. Reach out to hear how we can create a detailed exit strategy for your business. 

Investment banking services and securities offered through Independent Investment Bankers Corp., a registered broker-dealer, Member FINRA / SIPC. Persient LLC and Independent Investment Bankers Corp. are not affiliated entities. FINRA Broker Check.

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