How to Develop an Exit Plan for Your Business
Have you been wondering if it’s too soon to build an exit plan for your business? The simple answer is that it’s never too soon. A well-made exit plan benefits everyone, and that involves creating it early.
The better you prepare, the smoother the transition when you do exit. And this involves all kinds of scenarios, from a buyout to a merger. You want to have everything planned ahead of time so things can go well for you and everyone who stays with the business to carry it on.
But aside from starting early, there are more tricks to getting an exit plan in place. And unless you’re adequately prepared, you may be undervaluing your business, missing out on better offers, or leaving your employees in the lurch. Follow these tips to make an ideal exit plan and help your business do better with or without you.
Study Strategies for Exit Plan
Unless you’ve made and executed an exit plan before, it can be challenging to know where to begin. This is not a skill many people develop with practice. Read up on everything you can find regarding exit plans. Learn where it took other entrepreneurs and think about the kind of strategy you want. Do you know how you intend to leave your business? Do you know when?
You do not have to have immediate answers to these questions, but they will be integral to your plan. The more you learn about how other exits worked and what they looked like for all involved, the more prepared you will be to develop your own plan.
Developing an exit plan for your business takes time, so start thinking about it early. Even if you don’t know when you may leave, knowing the steps you need to take to initiate a smooth transition are imperative. Your business relies on you to succeed. If you plan your exit poorly, the company may not survive. And you might think that it isn’t the end of the world since you won’t be there, but it doesn’t reflect well on you as an entrepreneur and business owner. Future investors and partners may be less keen to work with someone who did not leave their business in good hands.
Exit Plan: Plan Your Future
One of the first things to do when developing an exit strategy is to imagine where you want to be in the next five to ten years. This might seem like a distant future, but exit plans should be initiated years in advance depending on the type of business and strategy behind the exit. And the more advanced planning you have, the better it will go.
You might still be with your present company in the next five years and intend to leave in ten. But then what? Where will you go after that? How do you envision your future? And what kind of future makes you excited and gives you something to look forward to? Plan some ideal scenarios and also plan some safe options. Dive into the many possibilities and look at what is probable in your current situation.
Don’t plan around receiving a million-dollar buyout when you haven’t had any interest from buyers before. Be realistic about where you can go and where you want to go. If you want that kind of buyout, start putting in the effort to make your company profitable and valuable starting today. The worst thing you can do for your future self is to delay the work that’s best done now.
You also don’t have to cut yourself out of your company in the future. You can stay on as a consultant, board member, or in another position. Exiting doesn’t have to involve completely disappearing from the company you built. When you are looking at your future plans, look at what you’ve learned by studying exit strategies as well. There may be options you haven’t considered.
Exit Solution Options
There are several possibilities for why you exit your business. And the strategy around these options will look different, so keep in mind what you want your exit strategy to look like. Consider these possibilities and which might work best for you and your company.
Succession
You might want to pass down the reigns to someone else. Your number two may be ready to take over and take the company to new places. If you’re running a family business, ensure everyone is on the same page. Running a company requires a lot of sacrifices, and even people who have been working there for years may not fully grasp what it entails.
Be detailed with your explanations and make sure whoever you plan to succeed you know the ins and outs of the business. You want them to succeed on your behalf because you did an excellent job helping them take over.
Third-Party Buyer
If you plan to sell your business, begin planning around three years out. You want to know what your business is worth at that point so that you can improve that number and know what a low estimate would be when buyers come to you.
Often selling to a third party means you exit the business entirely. Setting it up and being transparent with investors and management will help that transition and allow everyone to prepare.
Exit Plan: Employee Buyer
One possible option is selling the company to an employee or employees, typically through an employee ownership trust. This is a great option to keep the company in trusted hands and can provide you with the comfort of knowing who is buying. You work with and trust these people, and you can start training them early for when your exit comes.
Build Up Your Business
You want to ensure that your business is ready for your exit and in the best place. Positioning your business for when you leave is crucial to the exit plan. A business that is doing better will be marked at a higher value. And if you plan to sell, that’s the best-case scenario. A successful business will attract attention, buyers, and higher offers.
By building an exit plan early, you can start to build up your business as well. Where are areas that need improvement? How can you better market your business to increase current sales for that future sale? And are all your employees in positions they need to be in to succeed? Have you started bolstering your management team so they can continue when you’re gone? These are critical questions to answer before you execute your plan.
Undergo Professional Valuation for Exit Plan
Another step you might feel is too early to do is having a professional valuation done on your business. However, this is a great way to see how your business is doing now and where you can improve. Most people don’t have an accurate estimate of what their business can sell for, which will help you better understand the current market. If you find the number low, it’s motivation to improve now so it can sell for more in the future.
You may need another one a few years later, but getting a jump on that will help you make your plan. It will tell you how it would sell this year and where you might improve to sell for more in the next.
Allow Inevitable Changes
The downside to planning ahead is fixating. You might start forming expectations based on your plan and feel blindsided when things change or don’t go perfectly. Treat the exit strategy as a movable thing. It is a shared document that allows for changes whenever you need them.
No exit will run exactly as planned, so remain flexible and open to possibilities as they arise. If the last few years have taught us anything, it’s that the future is unpredictable. Staying flexible and keeping an open mind could help you see better options that come up instead of sticking to a plan you made years ago.
Create a detailed document, but allow for adjustments to achieve the best outcome.
Not the Only Option
If you’re planning an exit strategy before receiving any interest for a buyout, you should remember that it’s not the only option. Some people may hope to create a business and sell it quickly, but your future shouldn’t rely on one possibility. When building a company, you should be thinking about how to help it succeed.
Focus on creating the best business you can, even if you plan to sell. But remember that you don’t have to exit, and you also don’t have to exit for good. Many people stay on with a business after they exit in some capacity. Plans can change, so leave the door open for yourself in case the future holds something different.
The Perfect Exit
Coming up with the perfect plan is next to impossible. Most things won’t match up exactly, and that’s okay. An exit plan aims to help you and everyone involved in your business prepare and feel ready for when the time comes.
Make a details plan and start work early, but don’t let it dictate every decision you make. Plan for what is best for the business, you, and your employees. Don’t keep people in the dark as your plans solidify; keep people updated with what’s coming next. The more you prepare and lead, the smoother your exit plan will go. And if you’re preparing to have some of those more complex conversations, this webinar can help you know what to say to help your employees with the upcoming changes.
