Planning an exit strategy is commonly overlooked in business planning, yet it plays a key role in determining the strategic direction for a business. Once implemented, it can safeguard your business, your family, your employees and yourself.
It’s never to soon to think about how and when you may wish or need to exit your business and how best to prepare for that day. A well designed strategy will safeguard your business, family, employees and yourself.
There are two exit strategy approaches:
- The owner remains in the business but is not active in day-to-day operations.
- The owner releases all interest in the company – they sell it.
Being prepared is important
But why would you design an exit strategy when you enjoy being in your business and things are working well for you?
The general assumption is that, eventually, owners will wish to exit their business for reasons such as wealth, retirement or the desire to pursue other goals. However, death, disability, family circumstances or divorce can sometimes lead to an early, unexpected and costly exit.
Without a carefully planned exit strategy in place to ensure a favourable outcome for themselves, their heirs or their employees, a business owner may find that their exit is not what they wanted.
Many good reasons for having a strategy
Integrating an exit strategy into your business’s vision, goals and strategy can help prevent costly exits. Defining your exit strategy now doesn’t mean you have to execute it any time soon. Some entrepreneurs use their exit strategy 4, 5 or 20 years later. As the owner, you should determine the expected outcome, parameters and results before exercising the strategy.
Besides having peace of mind that you can exit your business profitably, other benefits of having an exit strategy in place include:
- protecting the value of the business you have built
- creating a smooth transition to your management team or family members
- generating a potential income for retirement or disability
- enhancing the future worth of your business
- reducing or deferring the potential tax impact on your estate
- creating a strategic direction for your business’s growth.
Think of it this way. Your business is an asset in which you have invested money and time. It has a revenue stream that supports your salary and possibly a sizable yearly profit. It should be increasing in value so that, when you wish or need to exit the business, you will be able to benefit from the additional wealth it has created.
Selling out most popular
The most popular exit strategy is to sell the business, sell the assets of the business, merge it with another business or sell shares in the business to the public at large.
Before you start this process, establish the value of your business. Arriving at a single figure is difficult, because so many factors should be considered.
First are the ‘hard’ figures like assets, liabilities, historical earnings and cash flow. Next are more subjective figures, such as projected earnings and the experience, expertise and quality of management. A firm’s reputation – or goodwill – has value too. Then there are external factors to judge, such as current market conditions, the sector a business competes in and the long-term viability of that sector.
Even when all these factors are evaluated, the final value may differ considerably from the value a prospective buyer or investor may arrive at — even after looking at the same figures.
Your accountant can assist you in arriving at a value on your share of the business.
NUMBERS ARE IN, WHAT NEXT?
Once you are satisfied with the potential value of the business, ask yourself a few questions:
- When is the best time for me to exit?
- What is the optimum exit option for my business?
- Can minority partners or shareholders block my exit plans?
- Can I plan to reduce the amount of tax I pay on exit?
- What aspects of my business will reduce its sale value or make it harder to sell?
- Who are the potential purchasers of my business?
- What steps do I need to take to improve my business for sale?
Stepping aside instead
The alternative exit strategy to selling and completely leaving the business is to develop a strong effective management team (replace yourself), withdraw from the daily operations and guide the business from the board. This may be a longer-term plan.
Articles are correct at the time of publication but may have since become outdated.