Having thrown everything into building up your business, the challenging part is figuring out an exit plan. Whether you’re looking to retire, sell, or pass the reins to the next generation, having solid business exit planning is crucial. But where do you start? Don’t worry, we’ve got you covered.
In this blog, we’ll break down the process of putting together an exit game plan aimed at lining up what matters most – your ambitions. From determining your objectives to working to maximize your business’s value, we’ll cover the bases, to potentially maximize your business value.
What is a Business Exit Strategy?
A business exit strategy is a carefully crafted plan that outlines how a business owner or entrepreneur will transition out of their ownership role. It details the approach for transferring ownership, liquidating the business, or securing a return on investment while meeting personal, financial, and professional goals.
An effective business exit strategy ensures that the business’s value is potentially maximized and losses are minimized, regardless of the circumstances—whether the business is thriving or facing challenges.
This strategy is not just a contingency; it’s an integral part of long-term business exit planning. The chosen exit path—whether a sale to an external buyer, an internal management buyout, or even winding down operations—shapes critical business decisions and prepares the company for a seamless transition.
Key Aspects of Business Exit Strategies:
- Types of Exits: Common strategies include mergers and acquisitions, initial public offerings (IPOs), succession planning, and liquidations.
- Goals and Priorities: The right strategy depends on the owner’s goals, such as retaining control, maximizing profits, or preserving the company’s legacy.
- Financial and Emotional Preparedness: A well-crafted exit plan balances financial returns with the emotional considerations tied to leaving a business.
Why Business Exit Planning Is Important for Owners
As a business owner, you’ve poured your heart and soul into building your company. But have you thought about what happens when it’s time to move on? That’s where business exit planning comes in.
It’s not just about selling your business and riding off into the sunset. It should be considered a strategic tool for long-term success and personal fulfillment. Every business owner needs an exit plan, regardless of the current state of their company whether you’re just starting, growing your business, or thinking about retirement, having an exit plan in place can help and never hurts.
A well-crafted exit plan helps set expectations for your company’s future, helping you make informed decisions for short- and long-term needs. If your exit plan sets specific milestones, you know the business needs to meet them. Your business exit plan could also set expectations for any potential buyout offers.
Preparing for Unexpected Events
From sudden illnesses to divorces, unexpected events can occur. A business exit plan could help you prepare for unexpected events by setting up contingencies in case of a long-term illness or by potentially minimizing risk caused by uncontrollable external factors.
Business exit planning should be incorporated into the overall business strategy. It can start with setting objectives and clear exit goals, such as when to sell or transfer ownership of the business and at what price.
Developing a Succession Plan
Succession planning is a key step in developing a business exit plan. Your succession plan should set expectations for key roles after you exit your business and help smooth organizational transitions. A good succession plan also gives your business time to develop the skills of key employees for the eventual transition.
Exit strategies detail all roles within a business and how responsibilities contribute to operations. With every employee and stakeholder well-informed, transitions are likely to be clear and expected.
5 Key Steps to Start Your Business Exit Planning Process
So, you’re ready to start thinking about your business exit plan. But where do you begin? Here are five key steps to get the ball rolling:
Building Your Professional Advisory Team
If you aren’t sure where to start, consider talking with a financial advisor. An experienced financial professional, particularly one with a CEPA® (Certified Exit Planning Advisor) designation can assess your business’s particular situation and work with you to develop an exit plan that aligns with your overall goals. Your exit planning team should also include your attorney, accountant, and other trusted advisors who understand your business and personal goals.
Having a sound understanding of expenses, assets, and business performance can help you seek out and negotiate for an offer that’s aligned with your business’s real value. Determine how much you want or need from a business sale to fund your next chapter.
Assessing Your Business’s Value
Prepare your finances. The first step to developing an exit plan is to prepare an accurate account of your finances, both personally and professionally.
Developing an exit strategy requires an in-depth analysis of finances. This gives a measurable value to inform the best-selling situation for your business. A thorough business valuation will also help you identify areas for improvement and strategies to increase your company’s worth before you exit and potentially make your business more attractive to buyers.
Potential buyers will value businesses with planned exit strategies because they demonstrate a commitment to business vision and operations. Consider ways to optimize your business operations, diversify your customer base, and implement systems and processes that can run without you. The more turnkey your business is, the more valuable it may be to potential buyers.
Identifying the Right Successor
If you intend to have your business continue as is after you leave, whether you plan to sell to an outside party or pass the reins to a family member or employee, identifying the right successor is crucial. Look for someone who shares your vision and values, has the skills and experience to lead the company, and is committed to its long-term success.
Start grooming your successor early on, giving them increasing responsibilities and decision-making power. A smooth leadership transition is key to a successful business exit.
Understanding the Different Types of Business Exit Strategies
Not all business exits are created equal. There are several different strategies to consider, each with its pros and cons.
Merger or Acquisition
In a merger or acquisition, your company is absorbed by or combined with another, often larger, company.
This can be a good option if you’re looking to quickly cash out and move on. However, it also means giving up control of your business and potentially seeing major changes to your company culture and operations. Any transformative business decision requires good strategy and planning. Your business exit is one such decision that will inevitably transform the business.
Management or Employee Buyout
With a management or employee buyout, you sell your business to your existing management team or employees, often through an employee stock ownership plan (ESOP). This can be a win-win, allowing you to exit on your terms while ensuring continuity for your team and customers. The best business exit strategy is the one that meets your needs for your financial, lifestyle, and legacy goals.
Selling a Portion of Your Ownership Stake
If you’re not ready to fully exit your business, selling a portion of your ownership stake to investors or partners can provide a cash infusion while allowing you to maintain some control.
This can be a good option if you need capital to grow your business or fund other ventures. Making business decisions with direction. With the next stage of your business in mind, you will be more likely to set goals with strategic decisions that make progress toward your anticipated exit.
Going Public with an IPO
For larger, high-growth companies, an initial public offering (IPO) can be a profitable exit strategy. Going public means selling shares of your company on a stock exchange, potentially raising significant capital.
However, it also means subjecting your business to increased scrutiny and regulatory requirements. It’s a complex process that requires careful planning and execution.
| Exit Strategy Type | Tax Implications | Who Benefits | Notable Characteristics |
|---|---|---|---|
| Merger or Acquisition | Capital gains taxes may apply to the sale proceeds, with rates depending on asset vs. stock sale structure. | Seller | Offers a quick exit but gives up control; may result in changes to company culture and operations. Requires careful planning. |
| Management or Employee Buyout | Potential tax advantages depending on structuring (e.g., ESOP). | Seller and employees | Allows continuity of business and leadership; may involve installment payments or gradual ownership transition. |
| Selling a Portion of Ownership | Capital gains taxes on the sale of shares; no immediate exit tax, as the owner retains control. | Seller (partially) | Provides cash infusion without fully relinquishing control; ideal for growth or funding other ventures. |
| Going Public with an IPO | High tax burden on capital gains and stock sales; strict regulatory requirements. | Seller and new shareholders | Potential for high financial return but comes with increased public scrutiny and compliance requirements. |
| Selling to a Third Party | Capital gains taxes apply to the sale proceeds, often depending on the business structure (asset vs. share sale). | Seller | Fast way to cash out, with immediate liquidity; however, may require giving up control and adjusting to new ownership. |
| Succession Planning | May involve gifting shares, which could incur estate and gift taxes; tax-efficient strategies (trusts, etc.). | Seller and heirs | Transfers ownership to family members or trusted individuals; requires long-term planning to minimize taxes and ensure continuity. |
Aligning Your Exit Strategy with Your Personal and Business Goals
Your business exit isn’t just about the money. It’s also about your personal goals and the legacy you want to leave behind. What do you want your life to look like after you exit your business?
Do you want to retire and travel the world? Start a new venture? Spend more time with family? Defining your post-exit lifestyle can help you determine how much money you need from your business sale and what type of exit strategy aligns with your goals.
Executing an exit strategy that’s right for your business’s value and your personal goals can help you transition to your next stage of life.
Ensuring Business Continuity
Your exit plan should also consider the longevity and continuity of your business. You’ve worked hard to build your company, and you want it to thrive long after you’re gone.
An effective exit plan will ensure business continuity by identifying and addressing personal, financial and business needs so you can confidently step away from a privately held business when and how you choose. Taking steps long before you’re ready to exit the business can set you up for a successful shift to your next chapter.
Potential of Maximizing Financial Returns
Of course, you also want to help to potentially maximize your financial returns from your business exit. This means carefully considering the timing of your exit, the valuation of your business, and the structure of your deal.
Work with your financial advisor, your tax professional and other experienced professionals to develop a plan that works to optimize your tax strategy and helps you get the best possible price for your business. To plan an exit strategy that provides maximum value for your business, consider the six following steps:
- Build your professional team
- Determine how much you want or need from a business sale
- Get a business valuation
- Boost business value
- Decide on a target buyer
- Execute your plan
Working To Minimize Tax Implications
Speaking of taxes, your exit strategy should also consider ways to help potentially reduce your tax liability. This may involve structuring your deal as an installment sale, taking advantage of capital gains tax rates, or using a charitable remainder trust. Work with a tax professional to explore your options and develop a tax-efficient exit plan.
The truth is, that business exit planning is good business. Many business owners might believe they don’t need to worry about having an exit strategy until the time for them to exit comes around. But that’s a bad idea – exit planning is something that shouldn’t wait.
How to Create a Comprehensive Business Exit Plan
Creating a comprehensive business exit plan is a complex process that requires careful planning and execution. Here are some key steps to follow: As mentioned earlier, your exit planning team should include your financial advisor, attorney, accountant, and other trusted professionals.
You may also want to bring in a business broker or M&A advisor to help facilitate your exit. For you as a business owner, exit planning is about being proactive and prioritizing the things you can control about transitioning away from ownership. A thoughtful exit planning strategy includes identifying and addressing personal, financial, and business needs so you can confidently step away from a privately held business when and how you choose.
Conducting a Business Valuation
A thorough business valuation is essential to determining the right price for your business and negotiating with potential buyers. Work with a professional appraiser or business valuation professional to get an accurate assessment of your company’s worth. Developing an exit strategy requires an in-depth analysis of finances.
This gives a measurable value to inform the best-selling situation for your business. Your exit plan should include a timeline for when you want to exit your business and the steps you need to take to get there. Be realistic about how long it will take to prepare your business for sale, find the right buyer, and complete the transaction.
Implementing Value Enhancement Strategies
In the months and years leading up to your exit, focus on implementing strategies that have the potential to increase the value of your business. This may include streamlining operations, diversifying your customer base, or developing new products or services.
Potential buyers will place value in businesses with planned exit strategies because it demonstrates a commitment to business vision and operations.
Communicating with Stakeholders
Finally, don’t forget to communicate your exit plan with key stakeholders, including your employees, customers, and suppliers. Be transparent about your intentions and timeline, and work to have a smooth transition for all involved.
The Role of Financial Advisors in the Business Exit Planning Process
Financial advisors can play an important role in the business exit planning process. Here’s how they can help:
Your financial advisor can help you assess your financial readiness for a business exit, including evaluating your personal financial situation, retirement goals, and estate planning needs.
Having a sound understanding of expenses, assets, and business performance can help you seek out and negotiate for an offer that’s aligned with your business’s real value.
Optimizing Your Business Structure
Your advisor can also help you optimize your business structure for a successful exit. This may involve talking with an attorney or tax advisor about restructuring your company as a C-corp or S-corp or implementing a tax-efficient ownership structure. If you aren’t sure where to start, consider talking with a financial advisor, or a qualified legal or tax professional.
An experienced professional can help assess your business’s particular situation and work with you to develop an exit plan that aligns with your overall goals. Once you’ve exited your business, your financial advisor can help you develop a comprehensive wealth management plan to potentially preserve and hopefully grow your assets.
This may include investment strategies, tax planning, and charitable giving. The best business exit strategy is the one that meets your needs for your financial, lifestyle, and legacy goals.
Navigating Tax and Legal Considerations
Finally, your financial advisor can work with your tax and legal professionals to navigate the complex tax and legal considerations involved in a business exit. This may include structuring your deal with a goal of minimizing taxes, drafting purchase agreements, and getting compliance with securities laws. If you have trouble making a decision, it may be helpful to speak with your business lawyer or a tax professional.
Explore Exit Strategies with Riverbend Wealth Management
Business exit planning may seem daunting, but it’s an important step toward having a thoughtful transition with the aim of achieving your goals. Start with clear goals in mind, assemble a stellar support crew, with the goal of helping to maximize your company’s worth, and weigh all your choices carefully – the goal of this recipe is to lead to an exit strategy that makes you smile.
Remember, your exit strategy is unique to you and your business. Take the time to carefully consider your priorities and work with experienced advisors to develop a plan that aligns with your vision. Just imagine – with some solid groundwork and an optimistic outlook, we believe you may be set to tackle whatever adventure comes your way next.
So, whether you’re dreaming of a sunny retirement, a new venture, or a legacy that lasts generations, start putting the pieces in place today. Your future self will thank you. For more information, contact Riverbend Wealth Management today.
Business Exit Planning FAQ’s
When should business owners start thinking about their exit plan?
Business owners should start thinking about exit planning early on, even if they plan to stay with their business for the next 10 years or more. Ideally, they should initiate their exit plan between 3 and 10 years before they want to step away from the business. This allows for proper planning and preparation, especially in case of unexpected circumstances that may force an early exit.
What are the consequences of not developing a business exit plan?
Without a well-defined business exit plan, owners may be forced to compromise on their goals and objectives when leaving the business. This can lead to costly, stressful, and frustrating situations that could have been avoided with proper planning.
What key issues should be considered when developing a business exit and succession plan?
When creating an exit plan and succession plan, business owners should consider several issues. These include tax planning, conducting thorough business due diligence and evaluation, deciding between a sale or succession, and addressing other exit strategy matters.
What is a significant advantage of having a business exit plan?
The biggest benefit of having a business exit plan is that owners can leave their business on their terms, potentially minimizing potential losses and liabilities while also potentially maximizing returns. An exit plan can help protect the interests, investments, and hard work that owners have put into building their businesses.
How can business owners get help with creating an exit plan?
Business owners can seek the assistance of qualified legal professionals who are experienced in business legal issues. These professionals can guide you and develop a comprehensive exit and succession plan tailored to the owners’ specific needs and goals, helping to have a smooth and successful transition.
