Why Every Business Owner Needs an Exit Plan

Are you ready to exit your business?

Many business owners are ready to hand over the day-to-day responsibilities of running a company. Far fewer have done the necessary preparation to ensure they can leave their business with financial freedom and a secure legacy. That type of readiness comes from an exit plan.

Every business owner should have an exit plan. And yet too few have a firm grasp of what exit planning is, and even fewer actually have a documented plan. Even if they do, often it’s insufficient and not tailored to achieving their specific goals.

The success of any business hinges on advanced strategic planning. Your exit is no different. That’s why it’s critical for every owner to know what an exit plan is, when exit planning should start, and how to create and measure a successful plan.

What Is an Exit Plan?

Despite being of critical importance to every business owner, a fair amount of confusion exists around exit plans and exit planning. Often the term exit plan is used synonymously with exit strategy. While the two work in conjunction to achieve the same goal, they are distinct from one another.

Even more concerning is the confusion between exit plans and succession plans, which serve different purposes and benefit different parties.

To understand the differences and subtleties of each, let’s start with a definition.

What is an exit plan?

An exit plan is a clearly stated set of business and personal goals that a business owner wishes to achieve in his or her exit. It should be documented in writing and include the tactics and steps required to effectively realize those goals.

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Exit Plan Vs. Exit Strategy: What’s the Difference?

People will often use exit plan and exit strategy interchangeably. While they are related, there are clear differences. Those differences help business owners approach issues related to their exit and better define their goals.

If an exit plan is a document that defines a business owner’s goals for leaving their business and the steps needed to accomplish those goals, the exit strategy is the way in which the plan will ultimately be realized. There are four possible exit strategies:
 

Sell to an outside buyer

Sell to an inside buyer

Pass on the business to family

Shut the company down


So which comes first, the plan or the strategy? It’s not quite that linear. The two are often used in tandem.

The high-level goals you outline in an initial exit plan can determine which exit strategy to pursue (e.g., wanting to keep the business in the family). But the chosen strategy will ultimately determine the tactics needed to accomplish that goal.

It’s critically important to identify an exit strategy, because the tactics associated with each are different, and they are mutually exclusive. For example, a business owner who wants to sell the company to an outside buyer will need to implement tactics that are inappropriate and counter-productive to passing the company to family members.

 

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A Succession Plan Is Not an Exit Plan

Because it involves preparing for a business leader’s departure, succession planning is often confused with exit planning. However, the terms are not synonymous. There are significant differences to how each is approached and the desired outcomes. Mixing up the two blurs your exit objectives in contrast to the business’s needs.

Succession planning is used by business owners and executives to identify and prepare someone to take over their role when they leave. Its purpose is to ensure a smooth transition during a change in leadership and keep the business operating as usual. Succession planning focuses on meeting the needs of the business.

That is markedly different from exit planning, which aims to meet the owner’s needs. While you may be deeply committed to your business’s long-term survival, your personal and financial goals should be of primary importance. An exit that achieves orderly leadership succession but leaves you financially vulnerable or without peace of mind is not a successful exit.

Sometimes, establishing succession can be part of exit planning. For instance, if you’re keeping a business in the family, it might be wise to draw up a succession plan that names your successor and details steps to prepare them for their new role ahead of your exit.

However, bear in mind that a sound succession plan does not automatically produce a successful exit. Likewise, a solid exit plan does not promise a smooth leadership transition.

Who Needs an Exit Plan?

Too many business owners fail to make an exit plan either because they don’t know they should or because they assume it doesn’t apply to them. They believe such measures are reserved for large corporations and enterprises.

The truth is that any and all owners of privately held companies need an exit plan. In fact, you probably can’t afford to not have a business plan.

If You Own a Business, You Need an Exit Plan

For most business owners, the majority of their net worth is tied up in their company. But it’s not just an investment of money. They care deeply about their business, having spent years pouring their heart and soul into it, and want to see it continue on after their eventual exit.

So what happens when you make the decision to leave? How do you access that value you’ve tirelessly worked to build? How do you ensure the company doesn’t collapse once you’re gone?

Without an exit plan, you lack a clear path for unlocking value from the company and achieving your personal financial goals. You also leave no direction forward for the company – no blueprint for it to carry on, continue providing jobs, and meet customer needs.

For a business owner, there are no drawbacks to having an exit plan. But there are several tangible benefits. The two most significant benefits are creating financial freedom for yourself and establishing a legacy.

Create Financial Freedom

financial-freedom-1Nobody wants to sell their business only to find they still need to work. Maybe you’ll want to continue working, but the goal should be to create enough financial security that you have some freedom and flexibility in what you do after you exit.

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However, unlocking that value is just one challenge for exiting owners. The other is maximizing that value. What many owners come to discover only when it’s too late is that many factors contribute to valuation of a company, including the owner.

Think about it: You’ve built and guided this business to success. You are a driving force behind that value of the company. Now you’re leaving, and that’s just one of several factors that can drive down the value. But your exit doesn’t mean you have to accept dimes on the dollar when you sell.

A good exit plan helps you maximize the value of your company ahead of a sale. By starting your planning well in advance, you can help ensure your company is desirable, even without you, while also creating a clear path to attaining the financial freedom you’ll need post-exit.

» Learn the 3 Financial Needs Business Owners Must Address for a Happy Exit

Establish a Legacy

globeMoney isn’t the only reason people start a business, nor is it their only concern when they’re ready to leave. Building a business involves a lot of hard work and passion.

But what happens when you leave? This is your legacy. Will your partner be able to maintain the same level of success? Will your heirs be able to keep it alive? Will the new ownership do right by your employees?

For many owners, it’s painful to think of their business falling apart after they leave. In fact, it’s so disconcerting that many put off their exit, even though they’re ready to leave.

However, when executed correctly, an exit plan can help you achieve a sustainable business legacy, allowing you to:

  • Leave the company in good hands
  • Position the company for future success
  • Thank and take care of your top people

While those are the biggest advantages to creating an exit plan, there are several other notable benefits, including:

  1. Exiting on your own terms
  2. Reducing the risk involved by accounting for as many variables as possible
  3. Saving time by laying the groundwork ahead of time
  4. Lowering costs (the typical exit costs anywhere from 30-50% of the business’s value, including taxes)

How to Make an Exit Plan

One of the biggest misconceptions about exit planning is that it’s a relatively simple process that can be done in short order.

But think back to how much effort and time it took to create your business plan, put it into effect, and get your company off the ground. Your exit deserves, and requires, the same kind of consideration, effort, and planning.

 

 

 

When Should You Start Exit Planning? Now!

Why now? The sooner you get started, the better. The more time you have to create and execute an exit plan, the better your return will be. A quality exit plan should begin five years out from when you plan to leave.

One of the biggest obstacles to the kind of proactive planning successful exits require is simple ignorance – most business owners don’t know they need an exit plan until they’ve started the clock on their departure.

Too many owners make the mistake of waiting to begin planning a year or two before their exit. That’s far too late. There are too many steps involved, and too much work that needs done, to leave it until the final months.

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The sooner you start thinking about your exit and begin to have meaningful conversations, the higher the likelihood you’ll be able to meet your goals. The fact that you’re reading about exit planning is strong indication that you should start creating one now.

What Should an Exit Plan Include?

An exit plan should be a comprehensive document that takes into account big personal issues, as well as some fairly complicated business matters.

To that end, a thorough exit plan is a fairly complex document. However, at a minimum, it should address six key areas. If you fail to consider any one of these elements, it creates more than just an overlooked gap. It leaves significant questions unanswered, which could ultimately lead to your plan causing more harm than good.

 

The 6 Primary Areas a Good Exit Plan Should Address

  1. Tax 
    The plan should be as tax efficient as possible in converting your business ownership into personal wealth.
  2. Legal 
    The plan should use sound legal tactics and instruments to protect you and your business.
  3. Financial 
    An exit plan should accurately model how you achieve your post-exit financial goals (most importantly, financial freedom).
  4. Operational 
    The exit plan should support the business’s current and future operational needs in areas such as management, financial stability, and reinvestment.
  5. Familial
    The plan should help to maintain family harmony and achieve family goals.
  6. Emotional 
    An exit plan should address whatever else may be important to your peace of mind in post-exit life.

 

dont-do-it-alone

 

Don’t Go It Alone, Hire a Specialist

You only get one chance to exit. If it goes badly, there are no do-overs, so don’t take any chances. Do it right. Work with a specialist that has experience and expertise in exit planning.

It’s tempting for business owners to do their own exit planning. Most have had control of every facet of their business since its inception, and they’re not inclined to let their exit be any different. The irony is that by failing to trust exit planning to a specialist, they risk forfeiting control to parties that don’t have the owner’s interests at heart.

For example, if your exit strategy is to sell to an outside buyer, that buyer likely has the advantage of having done many previous acquisition deals. More than likely, they also employ advisors whose goal is to get the best possible deal for the buyer.

By handling your own planning, you’re giving the buyer a distinct advantage (and control) of the deal.

 

5 Costly Mistakes Owners Make

Creating your own exit plan can be costly, and it usually starts with these common errors:

  1. Waiting Too Long 
    You need to start a minimum of five years out.
  2. Confusing Growth with Value 
    Just because the company is growing doesn’t mean it’s getting more valuable.
  3. Focusing Too Much on a Specific Sale Price 
    Often the sale terms are equally important. For example: Are you getting all cash at sale, or do you have an earnout? Will the buyer let you walk away or require you to keep working for a period of time?
  4. Lacking Clear Goals 
    Because it’s an emotional and complex issue touching a range of crucial subjects, owners often aren’t able to communicate and prioritize their goals.
  5. Not Working with an Expert 
    Business exits are a highly specialized process, and owners often wrongly assume long-term advisors, such as CPAs and lawyers, are up to the task.

Given the complexity of the business, legal, tax, and financial issues involved, it only makes sense to partner with an expert that specializes in exit planning. Not only will a qualified specialist be able to navigate you through the process, they can add value to your exit.

 

7 Ways a Specialist Adds Value to Your Exit

Having an expert in your corner gives you an advantage from the start. In addition to guiding you through the ins and outs of exit planning, they also bring valuable insight. A qualified specialist will:

  1. Calculate and model the minimum sale price the owner needs to achieve financial freedom.
  2. Analyze the company’s financial reports and verify they are ready for buyers to review.
  3. Recommend, design, and implement compensation plans that reward top employees, encourage them to stay with the company beyond your exit, and help build the company’s value.
  4. Identify and help organize the hundreds of documents often requested by buyers during due diligence.
  5. Help craft a communication plan for you to use with key employees, customers, suppliers, etc.
  6. Suggest tax strategies for you and your tax advisors to consider to reduce taxes during the exit.
  7. Verify the business partners are legally able to sell the company (if there are multiple owners).

 

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Approach Your Exit Like You Approached Building Your Business

Every business is different and every business owner is unique. No one-size-fits-all exit planning solutions exist, and you should be wary of anyone who diminishes the significance of an exit plan or the effort required to develop a successful one.

Similarly, steer clear of cookie-cutter plans with a set-it-and-forget-it mentality. An exit plan should never be a static document that’s drafted once and put on a shelf until you’re ready to leave. It should be a living plan that you and your advisor continually revisit and use to track progress toward your goals.

Exit planning is a complex process. But if you approach it with the same mindset and commitment you used in building your business, there’s no reason you can’t succeed in achieving all of your exit goals.

 

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