The Importance Of Having An Exit Plan For Business Owners
What is an Exit Plan?
An exit plan is a blueprint that outlines how a business owner will contribute to the success of their business and transition ownership within their desired timeframe and terms. A well-thought-out strategy should answer important questions such as:
- How do stakeholders intend to achieve their goals, desires, and intentions?
- What will the company be worth when it’s time to sell?
- What can be done to enhance the company’s value and ensure a smooth transition?
- What are the various possible exit paths, such as selling to a strategic buyer/financial buyer/management team/family members, forming an ESOP, or retaining control and instituting incentives for other owners?
- Can the owner consider deal structures that provide the opportunity to take two liquidity events or a total divestiture?
- Is there a way to reduce income and estate taxes?
- What is the “number” (the amount of money needed to close the deal), and can the owner lead their desired lifestyle with that amount?
The development process of an exit plan is more critical than its final product. Utilising the planning process correctly can help business owners answer these questions, expand their view of possibilities, develop a viable game plan, and increase their net worth.
Phases of Implementing an Exit Plan
There are typically four phases of implementing an exit plan, each with several elements:
- Self-Examination: The decision of when and to whom to sell a business is significant for most business owners. Therefore, a continuous clarification of stakeholders’ goals, desires, and intentions should be part of the exit planning process. A vision statement should also set out the owner’s vision for the business, how they intend to be involved during the transition, as well as a plan for the company’s future leadership
- Planning and Assessment: Exit planning involves assessing the business and its opportunities to help owners make decisions. Various types of transactions and buyers should be considered when estimating the current market valuation of the business. The company’s value drivers, such as its unique selling proposition, client concentration risk, profit margins, and senior management team’s experience, should also be evaluated.
- Aspects of Development: Timeframes and benchmarks are outlined during the development phase, and the decision as to which exit pathway to pursue, as well as the estimated selling price, will influence the members of the advisory team. It is also essential to coordinate the exit plan with the owner’s estate plan, and a business continuity plan should be reviewed or developed to safeguard against unforeseen events.
- Implementation: The implementation of the plan is influenced by its objectives and timeframe. Value enhancement strategies and/or succession planning can extend the life of many exit plans. Since the exit plan may involve multiple players, it’s essential to assign tasks and due dates and meet with stakeholders periodically to clarify or refine objectives.
Having an exit plan may seem like a lot of work, but it is crucial to getting more money from your investment when it’s time to sell. A fun and energising planning process should also provide peace of mind. Therefore, it’s essential for business owners to understand the importance of having an exit plan and to start developing one today.
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