It all began with a brilliant idea.
You turned this idea into a business. There was a formal business plan written up. A detailed description of the structure for finance and operations. Even several employees that were hired. After all that work for starting your company, you aren’t thinking about leaving.
But, you should be.
In the life of any business owner, there comes a time when you move on. Either you retire. Or you sell your stake in the company to others. You might even pass your business down to your kids. The point is, you’re transitioning out. Making your exit, as it were.
The reality is that when the founder of any business leaves, it leaves a void. The business has operated under the leadership of its founders for years. They have been responsible for the direction of the business. Plus, founders often have their finances tied up with their company. When this individual (or individuals) exits, it impacts the security of both them and their business.
That is, when they do not have an exit plan.
Many business-owners - even the ones who know they will leave in the future - do not have an exit plan set up. Exit strategies are crucial for business owners. They ensure the company remains profitable and operational after the current owner leaves. This minimizes potential losses. And aids in the financial security for the exiting owner.
Let’s get into what an exit plan is and how you make one.
What is an Exit Plan?
Exit plans are not one-time documents that you draw up and set aside. They are systematic and strategic roadmaps for a company.
An exit plan prepares the business for the eventual departure of its owner. It focuses on strengthening the company. And aligning its operations with the owner’s financial and personal goals. Through an exit plan, owners address the company’s value, plus the funds they need for their next chapter. They also prepare for tax and other legal requirements associated with business ownership.
To some, setting up an exit plan at the same time that they are establishing their company doesn’t make sense. But, it is beneficial. Exit plans often dictate the decisions made within the company. Having one set up lets owners structure their company so it’s shielded from their eventual exit.
What is the Benefit of an Exit Plan?
Having an exit plan in place gives you a destination. If you have a destination, you know when you’ve reached it. And you know where you are going.
Throughout the life of your business, you face many decisions and challenges. Each of these are opportunities for moving closer to your goal. You know what you want to achieve. So, all decisions you make are measured up against that. Are they bringing you closer to your goals? Or farther away?
As you handle the day-to-day of your company, you aren’t stuck making day-to-day decisions. Exit plans give you direction. Thus aiding with making strategic choices based on more than your current situation. Things change. Especially over the course of several years. With an exit plan, you navigate the waters of business ownership with a solid boat and some oars. Otherwise, you’re left floundering in the water with a boat full of holes you hope moves in some direction.
Exit plans also help your company enjoy a higher valuation. Without one, your company’s value stays roughly the same when ownership changes. But, exit plans let you build value over time. You establish better operations and hire stronger team members. All because you are planning for your eventual exit. So, the valuation of your company when you transition out is much higher than it normally is.
Finally, the biggest reason people want an exit plan is its preservation of legacy. A strong exit plan safeguards against potential issues in the future. It protects what you spent your life building. Further, it protects your family.
This gives you peace of mind. Instead of worrying about the future, you make your business what you know it can be. You focus on the now, knowing you, your legacy, and your family, are protected against both planned and unplanned situations.
What is the Purpose of Two Exit Plans?
That point about planned and unplanned situations is exactly why you need two exit plans.
There are what many refer to as voluntary exit plans. These are plans designed on your timeline. They designate the successor you want, and highlight the amount of money you need. With a voluntary exit plan, dealing with unsolicited buyer inquiries is easier. Why? Because you already have a plan!
You aren’t scrambling for an exit strategy. You know what you are doing. You know why you are doing it. And you know what decisions bring you closer to your goal.
An involuntary exit plan still prepares your business. But, as the name implies, it is not built around your timeline. In fact, involuntary exit plans have no timeline. They cover things like illness or financial failure. Things that still result in your exit as business owner, but not things that you are foreseeing.
The goal of an involuntary exit plan is preparing to the best of your ability. Think of what successor you would prefer in an involuntary exit situation. Make sure they are trained for the position. And that they understand the role of being a business owner.
Consider the current staff and assets held by the business. In situations of financial struggle, list the non-essential positions and assets.
Have both of these exit strategies set up. Use them both for guiding business decisions. This will protect your company through all types of exit situations.
What Goes Into a Good Exit Plan?
Not all exit plans are created equal. As I said earlier, exit plans are not one-time documents you make and ignore. They are a strategy. All good strategies have common components, though. So, what are some common components of a strong exit plan?
Timeline
This only applies to voluntary exit plans. But, consider your timeline for leaving your business. Also, consider your target metrics. For instance, you plan on exiting at the end of December in 2045. By that point, you hope for $5 million in annual sales.
The date of when you exit is usually non-negotiable. The target can be. Maybe December 2045 comes and you only have $4 million in annual sales. Well, then it’s up to you what type of exit makes the most sense.
The point of having both a target and a time set in stone is because it gives you a destination. Throughout the life of your business, you make decisions that aid in reaching that $5 million in annual sales. Why? Because it’s your goal. And you now have a long-term direction for your company.
Personal Goals
What does a successful exit mean to you? Perhaps you envision removing yourself from the company. You are planning on having it transferred to a different business leader in its entirety.
Or, maybe you think exit success is only diminishing your responsibilities. Instead of handling all day-to-day operations, you work in a portion of the company. Ownership still belongs to someone else. But you aren’t entirely separated from your business.
Whatever your idea of success is, figure it out. And build your plan around that. The point of exiting is that you no longer have an ownership stake or position. That doesn’t mean you have to completely remove yourself from, though.
Business Valuation
Take stock of your current position. Evaluate - or have a professional evaluate - what your business is valued at, currently. Then, think about what valuation you hope for by the time you exit.
Over the course of your exit plan, make decisions that aid in building that valuation. Develop operations that are more desirable to potential buyers. Build up assets that increase value. Constantly improve the performance of your company.
If you know where your business sits, and where you want it, you more easily see its shortfalls.
Potential Buyers
This doesn’t pertain if you plan on handing your business over to family. But, if your intention is selling your company, do your due diligence. Get a list of prospective buyers. Consider what they look for when acquiring companies. And create prospective buyer personas.
Based on these personas, direct the development of your business. I sound like a broken record here, but if you know where you are going, then you know how to get there. Understanding the buyers you want lets you prepare over years instead of hoping for the best.
Operational Independence
Look, your goal is removing your involvement. Or diminishing it. You want a business that operates with little involvement from you.
This guarantees that the company remains stable after you leave. Since operations continue without your involvement, your removal won’t have much impact.
Plus, it also makes your company more appealing to prospective buyers.
Legal and Tax Structuring
Transferring a business to someone else requires more than just two signatures. Though, that would be nice.
In truth, there are a lot of legal and tax structure considerations. Handing your business to another, whether family or a buyer, is not simple. There are costly potentials. Along with your exit plan, figure out an estate plan and ownership transfers. Getting these in order saves you from potential headaches.
Also, look at tax strategies that protect any proceeds from your business. When you exit, you don’t want the new owner(s) saddled with sudden debt or tax responsibilities.
Protecting Your Legacy While Moving On
There are a lot of different exit strategies that you can choose from. Either selling the company to a third-party, transferring it to children, or selling to a long-time friend. Each situation depends on your goals and your company. I’ll go more into detail about the options in a different post.
For now, you need to know the basics. You must know what an exit strategy is and how beneficial having one is. Further, you must be aware of the basic components of one.
Don’t wait too long for setting up an exit plan. Too many owners make that mistake. You want one about five years before you plan on leaving. And that’s the minimum. Longer is better.
Business owners who exit well are the ones with a plan. Make sure you are one of those owners.
Plan ahead of time. Plan well. And build your company so it works for you, both before and after you leave it.